Accounting and Auditing Research Tools and Strategies, 10th Edition , Thomas R Weirich, Thomas C Pea

Accounting and Auditing Research Tools and Strategies, 10th Edition By Thomas R. Weirich ,Thomas C. Pearson, Natalie Tatiana Churyk

Email: Richard@qwconsultancy.com

Student Cases with Solutions to accompany Accounting & Auditing Research: Tools & Strategies NOTE: In addition to the text’s exercises and problems, this file presents several short cases for students to access the authoritative literature or other relevant sources to address a particular issue. After each case is presented, the solution appears in color.

Topical Index of Cases for Students INTERMEDIATE ACCOUNTING Cases Case 1: Reporting acquisition and repayment transactions in the Statement of Cash Flows Case 2: Recording a forfeited payment Case 3: Revenue and expense recognition associated extended warranties Case 4: Accounting for “due on demand” note payable Case 5: Purchase of a controlling interest with a greenmail premium Case 6: Revenue recognition in the construction industry Case 7: Accrual and measurement of interest payments Case 8: Recognition of an asset transfer when title has not yet been received Case 9: Capitalization of interest and property taxes on a construction project Case 10: Deferred compensation and life insurance policy recognition Case 11: Reporting earnings per share balances for subsidiary companies Case 12: Deferment of lease payments Case 13: Disclosure of prior period adjustments in the statement of cash flows Case 14: Measurement and recording of payments for sick days Case 15: Comparative cash flow statements Case 16: Social security benefits as assets Case 17: Recording a stock dividend as a stock split Case 18: Gain on a nonmonetary exchange ADVANCED ACCOUNTING Cases Case 1: Reporting of letters of guarantee notes payable Case 2: Factors affecting minority interest control Case 3: Profits and losses in the investment in foreign currencies Case 4: Amortization of foreign currency transaction gains and losses

Case 5: Reflection of expensed computer programs on consolidated financial statements Case 6: Classification of a proposed financial instrument as a hedge Case 7: Disclosure of proceeds and payments from cash flow hedging activities Case 8: Proper valuation of a “guaranteed” business combination GOVERNMENT AND NOT-FOR-PROFIT ACCOUNTING Cases Case 1: Recognition restricted or non-restricted assets that are promised but not received Case 2: Affect of “permanent” reductions in the value of “promised” assets Case 3: Disclosure and classification on a company’s Statement of Cash Flows Case 4: Disclosure of potential interest rate swings and commercial paper by a city Case 5: Capital and operating leases between related parties Case 6: Elimination of profits on intercompany sales Case 7: Accrual of vacation time of unestablished employees AUDITING Cases Case 1: Communication with predecessor auditors Case 2: Interim Financial Statements Case 3: Outside services for inventory counts Case 4: Service Organizations Case 5: Liquidation Basis of Accounting Case 6: Re-issuance of financial statements Case 7: Qualified report and account classification Case 8: Reporting on financial statements including accompanying information Case 9: Accounting for assets held for sale TAX Problems and Cases Tax Problems (students look up various sources) Tax Case 1: When should gross income be accrued? (Basic) Tax Case 2: Stock Purchased by an Employee (Intermediate) Tax Case 3: Business Deductions (Intermediate) Tax Case 4: Deduction for Foreign Travel (Intermediate) Tax Case 5: Income Sourcing – International Tax (Advanced) Tax Case 6: Contingent Liabilities in a Tax-Free Transfer (Advanced) MISC. RESEARCH Cases Case 1. Apple Proxy Case

Case 2. Fifth Largest Fortune 500 Company Case 3. Finding an Article on Corporate Governance Challenges Case 4. Automotive Industry and Tesla Case 5. Dodd-Frank and Corporate Governance Reforms ================================= INTERMEDIATE ACCOUNTING Cases Case 1: Mead Motors purchases an automobile for its new car inventory from Generous Motors, which finances this transaction through its financial subsidiary, Generous Motors Credit Company (GMCC). Mead pays no funds to Generous Motors or GMCC until it sells the automobile. Mead must then repay the balance of the loan plus interest to GMCC. How should Mead report the acquisition and repayment transactions in its Statement of Cash Flows?

Case 1 Solution: Problem Identification: How should a company report, if at all, cash and non-cash transactions owed to an entity’s financial subsidiary?

Keywords: Cash flows; financ* subsidiaries; operating income.

Conclusion: Per ASC 230-10-50-5, Mead should exclude transactions that involve no cash payments or receipts. However, per 230-10-45-17, it should record cash payments to GMCC for repayments of principle (and interest thereon) due to suppliers or their subsidiaries as operating cash (out) flows.

Case 2: Narda Corporation agreed to sell all of its capital stock to Effie Corporation for three monthly payments of $200,000. After Effie made the first required payment, it ceased making other payments. The stock subscription agreement states that Effie, thus, forfeits its payments and is entitled to no other future consideration. How should Narda record the $200,000 forfeited payment?

Case 2 Solution: Problem Identification: How should a company account for forfeited stock subscriptions? Moreover, do such payments constitute operating or other income?

Keywords: Stock Subscription; operating income; additional paid-in capital; owners’ equity; net income; operating income.

Conclusion: Per 505-10-25-2, capital transactions that incur no future corporate obligations should be excluded from calculating net or operating income. Thus, the

forfeited cash should become part of additional paid-in capital about any required disclosures for such transactions.

Case 3: Lowland Appliance Stores offers customers purchasing its appliances separately priced (extended) warranties. Lowland services these extended warranties. Its customers can receive no refunds for not using these warranties, and, of course, Lowland must honor these contracts—regardless of any future costs in doing so. It also “tracks” the profits and losses these types of warranties generate by appliance category—in order to help maintain a competitive price and costing structures. How should Lowland recognize the revenues and expenses of such extended warranties?

Case 3 Solution: Problem Identification: How should a company recognize revenues and expenses associated with separately priced, extended warranties? Such contracts generally are (potential) loss contingencies.

Keywords: Loss contingency; non-refundable Conclusion: Per 605-20-25-3, such extended warranties constitute “product maintenance contracts,” where Lowland agrees to perform certain agreed-upon services to these products for a specific time period. As such, it should recognize revenue on a straightline basis over the contract period, unless sufficient historical evidence indicates a superior alternative method of doing so. Lowland should also “match” any related costs in the same time period as the associated revenues. Moreover, Lowland should recognize a loss on such contracts that have an expected net cumulative loss over the remaining contract periods. Further information on this topic also appears in 450-20-05-3 and 46010-25-5; FASB Concepts Statement No. 5, pars. 83 and 84; and FASB Concepts Statement No. 6, par.197.

Note: ASU 2014-09 supersedes solution 2018 – transition 606-10-65-1 Case 4: As of January 1, the Lohse Company owes the First Arbor Bank $350,000 which is due on December 31. Since Lohse seems unable to repay the note, the bank agreed that Lohse can “settle” this balance by agreeing to make four, annual installments on each of the next four years, provided that it adds a “due on demand” clause to the note.

Specifically, the lender will “do its best” not to call the note “provided that no adverse significant shift in operations occurs." However, First Arbor Bank has the sole discretion to ascertain if these adverse conditions arose, and then to call the note due immediately.

How should Lohse account for this above situation?

Case 4 Solution: Problem Identification: How should a company account for notes payable containing a “due on demand clause” and both a short- and long-term schedule of payments due?

Keywords: Due on Demand; Notes Payable; Classification of Obligations; Installments.

Conclusion: Per 470-10-45-9 and 10, notes that are “due on demand” should be considered as a current liability. However, if Lohse expected to refinance this note on a long-term basis (and a reasonable basis to demonstrate such refinancing existed), it would then reclassify the note as a long-term liability.

Case 5: On January 1, the Chin Company agreed to purchase all of Jack Jackson’s interest in the company for $30 per share. Jack, who owns 15%—and a controlling interest of Chin—previously threatened to engage in a hostile takeover attempt of Chin.

For the last two years, Chin’s stock traded from about $12-23—reaching $23 on December 31 of last year. How should Chin record this transaction?

Case 5 Solution: Problem Identification: Do “greenmail” payments constitute treasury stock transactions? Should Chin assign any “premium” to acquiring Jackson’s controlling interest in the Company, and, if so, how much should it assign to the “greenmail” premium?

Keywords: Treasury Stock; Greenmail; Capital Stock; Capital Transactions.

Conclusion: Per 505-30-25-3, companies often pay “premiums” (and can even receive “discounts”) to acquire large (potentially controlling) blocks of stocks in the open market.

An entity offering a higher purchase price than the open market price should allocate some portion to the unstated rights or privileges and give separate accounting recognition.

Case 6: Bo Broker Company charges a fee for bringing together the Acme Construction Company and the First Bank Company. The parties agree that Bo earns her fee when Acme and First “agree” to the terms of the construction mortgage. However, Bo can receive four types of documents to “settle” this matter: (a) a non-interest bearing, unsecured “negotiable” note in payment of the fees earned, which is payable over the time period of the related construction mortgage; (b) a non-negotiable note payable over the same time period as in case (a); (c) a commitment letter, not contingent upon the “future event” of the borrower receiving certain construction draws; or (d) a commitment letter, where the fees would be paid only if the borrower actually receives the draws for the construction from the lender. Bo asks the accountant when to recognize revenues under each of these four scenarios.

Case 6 Solution: Problem Identification: What circumstances must exist for an entity to recognize income—especially regarding the issue of when it can “control” the events leading to recognizing revenue?

Keywords: Revenue recognition; construction industry; commitment letter; contingency.

Conclusion: Per 450-20-25-3 Bo should recognize the revenues for each of the four cases as follows: (a) for the negotiable note, recognize income at the earlier of when services are performed and billed or when receiving consideration for the proceeds of the note; (b) same as “(a),” except that early consideration is not feasible; (c) for the commitment letter, recognize revenues upon receipt of this “outside” commitment letter which shows the completion of the earnings process; and (d) defer recognizing revenues until both outside parties fulfill their contract obligations.

Case 7: James Olds buys a four-year, $1,000,000 certificate of deposit from the Second National Bank. James will receive 5% interest in year 1; 5.5% in year 2; 6% in year three; and 6.5% interest in year 4. If James “redeems” this certificate before the maturity date, he would receive a cumulative 4.5% annual rate of interest of 4.5%. The Bank has ascertained that less than one percent of its depositors redeem their certificates before the maturity date. The bank asks its accountant how to accrue and measure such interest payment obligations.

Case 7 Solution: Problem Identification: Should the Bank recognize the future interest costs by: (1) accruing interest @ 5% for the first year, 5.5% for the second year, 6% for the third year, and 6.5% for the third year, plus appropriate compounding factors—and debit interest expense and credit interest payable for these bonds? Or, instead, should the Bank determine the total interest that James is slated to receive at the end of the term of the bond, and accrue a pro rata share of this amount for each month of the four-year term of the bond?

Keywords: Bond amortization and discount; contingent liability; interest expense.

Conclusion: Per 450-20-25-1 and 3, since only a remote possibility of early withdrawals exists, the Bank should use the above, monthly pro rata approach to recognize the interest due to James.

Case 8: On January 1, year 1, Melvin Corporation promises to “unconditionally” transfer a building that cost $100,000 (appraised recently at $300,000) to the Vivian Company on January 1, year 2 for a boat she bought for $250,000. As of December 31, year 2, Melvin still has not transferred title to the building, although it received title to the boat. How should Vivian and Melvin record these transactions?

Case 8 Solution: Problem Identification: At what value should Vivian and Melvin recognize like and/or non-like kind exchanges? Should the parties recognize this transaction before Vivian receives title to the building?

Keywords: Like-kind exchanges, nonmonetary transactions; barter transactions; contributions recognition; revenue recognition.

Conclusion: Per the provisions of 845-10-30-1, for “different” types of assets exchanged, both parties should recognize the acquired assets at their fair market value(s).

Since Vivian’s transaction seem more recent and objective than Melvin’s, the $250,000 value seems more appropriate. 958-605-25-8, a donee receiving an unconditional promise to receive an asset should recognize it as a receivable (until it is received). Thus, Vivian should recognize the $250,000 receivable, unless reasonable, contrary evidence arises that she should recognize some “allowance for uncollectibles” for the possibility of not receiving it.

Case 9: Herb Construction Company is building a hotel for speculative purposes. That is, the Company has not yet found a buyer for the hotel, but expects to do so within a few months. Herb, who expects to spend about another two years to complete construction of the hotel, asks his accountant if interest and property taxes associated with this construction site should be capitalized or expensed. At what rate of interest should Herb use, if any, to capitalize any interest costs?

Case 9 Solution: Problem Identification: Should property taxes and interest during construction of a hotel be capitalized or expensed? What rate of interest should be used to capitalize any interest costs? Does the fact that no present buyer for the project does not exists affects he results derived?

Keywords: Property taxes; interest: capitalization; construction.

Conclusion: Per 720-30-45-3, property taxes paid for property under development for use or sale can be capitalized but is usually treated as a period expense. Assets constructed for sale are considered qualifying assets for interest capitalization per 83520-15-5. Per 835-20-30-3 through 30-4, Herb should use a rate of interest that can be “directly” associated with the project under construction. Or a weighted average of rates applicable to other debt that Herb has incurred (even if it were associated with other projects).

Case 10: In order to help induce Jill Gregory to remain as president of the Reed Company, in 2000 it promises to pay her (or her estate) $200,000 per year for the next 15 years—even if she leaves the company or dies. Reed wants to properly record this transaction as deferred compensation, but is unsure of how many years it should use to amortize this cost. Moreover, Reed also purchased a “whole life” life insurance policy for Jill, naming the company as the sole beneficiary. Reed wants to ascertain if it can offset the cash surrender value of the policy against the above deferred compensation liability.

Case 10 Solution:

Problem Identification: How many years should be used to amortize deferred compensation? Can a company offset the cash surrender value of the policy against deferred compensation liability?

Keywords: Deferred compensation; purchase life insurance.

Conclusion: Per the provisions of 710-10-25-9, the future payments should be amortized over the 15 remaining years of the contract. Moreover, per 325-30-35-1 through 35-6, Reed should report changes in the cash surrender values of life insurance policies as offsets to insurance expense costs—not as reductions in deferred compensation.

Case 11: The Bootsie Holding Company has sales exceeding $10 billion and each of its three, wholly-owned subsidiaries has sales exceeding $2 billion. Three years ago, the subsidiaries had “complex” capital structures—until Bootsie acquired them. Bootsie’s annual report shows its consolidated income and individual income statement accounts of each subsidiary company. Should Bootsie also report separate earnings-per-share balances for the three subsidiary companies?

Case 11 Solution: Problem Identification: Should wholly owned subsidiaries report separate earnings per share balances?

Keywords: Earnings per share; earnings per share: applicability.

Conclusion: Per 260-10-15-2, companies whose securities are traded publicly (or soon expect to do so) should disclose such earnings per share data. However, wholly owned subsidiaries need not do so (since no separate market for their securities exists).

Case 12: Leila Company began an operating lease arrangement with Debco Industries, which was slated to begin on January 1, at monthly lease payments of $10,000.

However, Debco’s negligence prevented Leila from moving in on time—since it failed to clean up the place adequately enough to earn a Certificate of Occupancy from the township. Thus, on January 1, Leila spent $5,000 for leasehold improvements, which enabled her to obtain the needed Certificate of Occupancy on April 1. In any event, Leila paid Debco all the required $30,000 lease payments and has decided not to pursue legal action for the “un-ready” building. However, can Leila defer the $30,000 January-March lease payments over the remaining 33 months of the lease contract?

Case 12 Solution: Problem Identification: Can a lessee defer portions of an operating lease payment for conditions beyond its control? I.e., do the periods of an operating lease begin when the payments are made or when the lessee takes operating control of the asset?

Keywords: Operating lease; leasehold improvement; capitalization of interest (or other) costs Conclusion: 840-20-25-2 states that lessees should consider rent inducements or rent “holidays” as part of the operating term of a lease. i.e., the physical period that rental property is available for use for the lessee serves as a better indicator of the amortization period of the rental contract than any payment period. Next, 840-30-25-3 states that lessees should account for scheduled rate increases over the time that the lessee takes possession of or controls the property. 835-20-15-2 also considers the time needed to get property ready for its “intended use” as the prime criteria to ascertain the capitalization period. Thus, Leila should amortize the $30,000 over the remaining 33 months of the lease.

Note: Content will be superseded by ASU 2016-02 for FYE after December 16, 2018.

Case 13: After the Julie Company issued its previous years’ financial statements, it noticed that it incorrectly calculated depreciation expense and, thus, disclosed this fact as a prior period adjustment in its current years’ financial statements. (This difference also did not affect any cash balances, since Julie maintained an operating loss for both periods.) However, Julie did not issue comparative financial statements in the current year. Julie now wonders how to disclose this prior period adjustment in its current year’s Statement of Cash Flows.

Case 13 Solution: Problem Identification: How should a company disclose prior period adjustments in its Statements of Cash Flows?

Keywords: Prior period adjustments; retained earnings; Statement of Cash Flows.

Conclusion: Per 250-10-50-9, Julie should disclose the effect of a prior period adjustment (for a single period’s financial statement) as an adjustment in the opening balance in retained earnings—plus make adequate footnote disclosures of the reasons for and effect of the adjustment. Moreover, per 230-10-50-3, Julie should also disclose information about investing and financing activities that did not result in cash receipts for the current period. Thus, Julie should also disclose the differences in the account balances of the two consecutive balance sheets both in the statement of cash flows and in an appropriate footnote.

Case 14: The Heather Company’s fiscal year ends on June 30. Its employees (with at least three months of experience) are entitled to 12 paid sick days annually for each calendar year beginning on January 1. An employee not taking his/her earned sick days would receive payment thereon on December 31 of that year. How should Heather record and measure such a liability as of June 30th?

Case 14 Solution:

Problem Identification: Should Heather recognize any liability for the above potential contingency, and, if so, how should it measure and record it?

Keywords: Contingency; compensated absence; matching concept.

Conclusion: Per 710-10-25-1, if : (a) the employees have worked the required time periods to earn the compensated sick pay; (b) these rights are vested; (c) payment of compensation is probable; and (d) the amount can be reasonably estimated, the liability exists. These conclusions follow “reasonable” and “probable” criteria of SFAS No. 5, pars. 5 and 22, which also require measuring the past “history” of employees using these benefits (e.g., also consider employee turnover). In this above, relatively simple example, an employee who used four days of vacation would be “entitled” to eight more—i.e., the balance that Heather must accrue. However, if, the employer plan were based upon an accrual concept, it would pro rate the untaken days for the remainder of year.

Case 15: Alex Corporation is planning this year to present comparative income statements but only the current year’s balance sheet. James Johnston, president of Alex Corporation requests your advice as to whether comparative cash flow statements for both the current and prior periods are necessary considering only the current year’s balance sheet is presented. Are there any authoritative pronouncements that address this issue that you could present to Mr. Johnston?

Case 15 Solution: Problem Identification: The issue is whether comparative cash flow statements are necessary when comparative income statements are presented, but only a single year balance sheet is also presented.

Key Words: comparative statements, cash flow statements Conclusion: 230-10-15-3 states that a business enterprise that reports both financial position and results of operations shall also provide a statement of cash flows for each period for which results of operations are provided. Therefore, comparative cash flow statements need also be presented.

Case 16: A new client for your firm is Sam Jones who is preparing personal financial statements for a bank loan. Mr. Jones is attempting to list his social security benefits to be received based on his future life expectancy as an asset on his financial statements.

Mr. Jones states that such benefits meet the definition of an asset. Would you agree to allow the social security benefits to be listed as an asset?

Case 16: Solution

Problem identification: The issue is whether social security benefits to be received based on one’s future life expectancy should be considered an asset on personal financial statements.

Key Words: assets, personal financial statements Conclusion: 274-10-35-11 states that nonforfeitable rights to receive future sums must meet certain criteria to qualify as an asset. One criteria states that the rights must not be contingent on the individual’s life expectancy or the occurrence of a particular event, such as disability or death. Since social security benefits are contingent on one’s life expectancy, such benefits do not qualify to be listed as assets on one’s personal financial statements.

Case 17: Albright Inc. has recently issued a 10% stock dividend to its existing stockholders. As a result of the issuance of the stock dividend the market price of the stock declined 25%. Albright has requested your assistance as to treating this stock dividend as a stock split. Would this be acceptable under GAAP? Case 17: Solution Problem identification: The issue for this case is whether a 10% stock dividend that reduces the market price of the stock can be accounted for as a stock split.

Key Words: Stock dividends, stock splits Conclusion: 505-20-25-1 through 25-3 state that to treat the 10% stock dividend as a stock split, Albright would need to demonstrate that the additional shares issued is large enough to materially influence the unit market price of the stock.

Case 18: Horizons Inc. has agreed to sell an investment in a subsidiary that has been accounted for on the equity method of accounting to a minority stockholder in exchange for the stockholder’s share in Horizons. Since the fair value of the investment exceeds its book value, Horizons CEO is considering recognizing a gain on the exchange. However, the new CFO at Horizons is recommending to the board of directors that the excess from the exchange be accounted as a credit to equity. Horizons turns to you for advice!

Case 18: Solution Problem identification: The problem under review in this case is whether a gain on a nonmonetary exchange can be recorded.

Key Words: Nonmonetary exchange, nonmonetary asset, or nonreciprocal transfer Conclusion: 845-10-30-1 states that a transfer of a nonmonetary asset is a nonreciprocal transfer and should be recorded at the fair value of the asset transferred, and that a gain or loss should be recognized on the disposition of the asset.

ADVANCED ACCOUNTING Cases Case 1: Rosie Corporation has 70% of the outstanding voting stock of Smith Corporation and 10% of the voting stock of Tommy Corporation. Smith also just spent $10,000 to acquire 20% of Tommy’s voting stock. Smith has issued irrevocable letters of credit to guarantee Tommy’s notes payable. In the current year, Tommy lost $100,000. How should the parties report the above arrangements in its consolidated financial statements?

Case 1 Solution: Problem Identification: How should guarantees among related (but not fully owned) parties be disclosed in both their consolidated and separate financial statements?

Keywords: Control; consolidated financial statements; related party transactions; gain and loss contingencies.

Conclusion: First, Smith’s share of Tommy’s net losses (20% of $100,000 = $20,000) exceeds its cost basis of Tommy ($10,000). Per 450-30-25-1, entities should normally not recognize gain contingencies. Thus, the guarantee should not be recognized in Rosie’s or Tommy’s financial statements—other than through disclosures in the footnotes. Per 810-10-45-21, losses excess, and any further losses, shall be attributed to those interests even if that attribution results in a deficit noncontrolling interest balance.

Case 2: Joe Brock owns 10,000 of the 60,000 outstanding shares of Big Corporation; Leslie Ross own 20,000 shares; Mark Jones and his twin brother Sam each own 5,000 shares; and about 300 other shareholders own the remaining 20,000 shares—with no one other shareholder owning more than 1,000 shares. According to the provisions of SFAS 94, since Leslie owns half of the outstanding shares, he, in general, “controls” Big Corporation and, thus, should consolidate his interest with that of the corporation.

However, Joe Brock is unhappy with Mark’s management decisions and plans to “challenge” his authority. What factors arise in considering if a minority investor can maintain such control or even prevent others from exercising such control?

Case 2 Solution: Problem Identification: Can corporate control rest with others besides the majority owner? What factors should we examine to make such a determination? Should we separately analyze situations where the minority shareholder seeks actual control, or (merely) wishes to “veto” another party (e.g., majority shareholder) from exercising this control?

Keywords: Consolidated financial statements; consolidation (of majority owned subsidiaries); contingencies; related parties; accounting changes.

Conclusion: Per 810-10-25-1 through 25-14, deciding if a minority shareholder can “overcome” the presumption that the majority shareholder maintains this control depends on many facts and judgments. First, can the minority shareholder participate, veto, or cause certain operating ordinary operating (e.g., which bank to hold corporate assets) (i.e., which it calls protective rights) and long-term (e.g., who sets top management’s salary and which tender offer to acquire the company to accept) (i.e., which it calls participating rights) management decisions to occur. Other factors include restating prior year’s financial statements if control passes to the minority shareholder; and does the minority shareholder control technology or customers of crucial interest to the company.

Case 3: The Treasury Department of Drof Motors invests “excess” funds daily (e.g., in foreign currencies). It, thus, earns profits and losses, which are included in the company’s consolidated financial statements. Should Drof consider its Treasury operations as a (distinct) segment in preparing its external financial statements?

Case 3 Solution: Problem Identification: Should corporate divisions that generate revenues and expenses qualify as an operating segment for financial statement purposes?

Keywords: Segment; operating division.

Conclusion: Per 280-10-50-1 all operating segments can be reported separately if they meet the guidelines: it generates revenues and expenses that a corporate decision-maker reviews, and has discrete financial information available. However, management should also believe that such additional information can contribute to outside readers and users better understanding the enterprises operations.

Case 4: The Builtwell Construction Company is building a hospital for a third party. As such it borrows substantial funds from a foreign bank and repays the required interest costs as scheduled. Builtwell also incurs some foreign currency truncation gains and losses on these transactions. Builtwell properly amortizes the interest costs over the life of the construction project, but would now also like to amortize the associated foreign currency transaction gains and losses as well. Can Builtwell amortize such costs?

Case 4 Solution: Problem Identification: Should a construction company amortize or expense the gains and losses of foreign currency transaction gains and losses expended while a building was under construction?

Keywords: Foreign currency translation; capitalization (of interest costs).

Conclusion: Although Builtwell apparently correctly amortized interest costs during construction—per the provisions of 835, it can not amortize such foreign currency transaction gains and losses. Per 830-20-35-1, increases or decreases in expected

functional currency cash flows become foreign currency transaction gains or losses, i.e., “period costs.”

Case 5: Tony Computer Services Corporation trades 50% of its common stock for the rights to certain computer programs of the Janet Corporation. Janet previously expensed such costs of developing these computer programs. Tony concurrently sold the other 50% interest in its stock to the Jeannette Company for $1,000,000. Tony later acquired another the rights to the Udder Computer Company’s computer programs in exchange for stock valued at $1,500,000. Tony, thus, debited Investments in Subsidiaries and credited Earnings for $1.5 million to reflect this latest transaction. How should Tony’s consolidated financial statement reflect the value of the expensed computer programs?

Case 5 Solution: Problem Identification: Should Tony recognize the “value” of the acquired computer programs, or should these results be consolidated, i.e., eliminated?

Keywords: Equity method of accounting; inter-company gains and losses.

Conclusion: Per 810-10-45-18, for fiscal years after December 15, 2008, complete elimination of intercompany income and loss is consistent with consolidated financial statements. The elimination of the intercompany income or loss may be allocated equally between the parent and the non-controlling interest. Moreover, Tony should ascertain that the $1.5 million stated value of the stock issued for the Udder Company is appropriate, e.g., by using “market valuation models” to test such valuations.

Case 6: The Rich Company seeks to limit its potential exposure from future variableinterest debt by engaging in a cash flow hedge. Thus, it seeks to acquire a financial instrument that varies in price “in opposition” to Rick’s expected payments on this debt instrument. However, it is unsure of the effectiveness of this hedging instrument—since it is unsure of the expected “timing” of such transactions. Can Rich classify this proposed financial instrument as a cash flow (or other) hedge?

Case 6 Solution: Problem Identification: How much detail must a company have about proposed hedging activities in order to categorize them as such?

Keywords: Hedging; interest rate swaps; financial instruments.

Conclusion: 815-20-25-1 lists the criteria whereas 815-20-25-2 through 25-132 list specifics to fulfill 25-1. 815-20-25-1 requires that at the inception of the hedge the company must document the risk being hedged and how it will assess the effectiveness of the hedging instrument. Thus, if the Company can not document the time period the forecasted transaction that it wants to hedge is expected to occur, and the nature of the

associated asset or liability involved, the transaction does not qualify as a hedge under GAAP. Case 7: Merrill Corporation engages in a valid cash flow hedge where it minimizes the risk from variable interest rated debt by promising to issue dividend payments from both its own portfolio and its portfolio of “outside” marketable securities. Since interest payments normally are classified on the Statement of Cash Flows as Operating Activities; payments of dividends from “outside” investments are classified as Investing Activities; and dividend payments from its own stock are financing activities, where should Merrill disclose the cash flows from the above transactions?

Case 7 Solution: Problem Identification: Where in the Statement of Cash Flows should Merrill disclose proceeds and payments from cash flow hedging activities?

Keywords: Hedging; cash flow hedging; statement of cash flow.

Conclusion: Per 230-10-45-27, cash flows from derivative instruments accounted for as fair value or cash flow hedges may be classified in the same category as cash flows from the (associated) item being hedged—provided that such an accounting policy is disclosed and the instrument does not include another significant financing element at inception in which case it should be classified as a financing transaction. Thus, the cash flows should be categorized into the operating, investing, and financing categories—provided adequate disclosures are made.

Case 8: On January 1, year 1, the Allen Company issues 100,000 shares of its stock (which is valued at $10 per share) to acquire the Natie Company. The purchase agreement also states that Allen will pay $200,000 in year two if Natie has net income of at least $400,000 in year 2. There is a 50% chance Natie will meet or exceed $400,000 of net income in year 2. How should Allen recognize this transaction?

Case 8 Solution: Problem Identification: This “contingent” value of additional payment during a proposed business combination asks the researcher to obtain a proper “value” for the proposed transaction.

Keywords: Business combination; measurement date; contingent payment.

Conclusion: Per 805-30-25-5, the acquirer shall recognize the contingent consideration and the acquisition at the fair value = (100,000 shares * $10) + (0.5 *$200,000) =$1,100,000 (not considering time value of money) GOVERNMENT AND NOT-FOR-PROFIT ACCOUNTING Cases

CASE 1: On January 1, the Hawaii Cancer Institute has received a promise from the Obama Foundation to receive a building that the Foundation recently appraised at $200,000.

However, the building cost only $125,000. The Cancer Institute promised to keep the building “permanently restricted,” i.e., never to sell it and to use it only for its work in helping cancer patients. As of the end of the Cancer Institute’s fiscal year (December 31), no title to the building was received by the Institute. How should the Institute record this transaction?

CASE 1 SOLUTION: Problem Identification: Should a not-for-profit organization recognize assets that contributors promised, but have not yet delivered? If recognition is required, what must the organization report?

Keywords: Not-for-profit, Restricted, Contributions.

Conclusion: Recognize unconditional promises to receive gifts at their fair market value. ASC 958-605-30-2. Thus, the Cancer Institute should recognize $200,000. Report the gift or contribution as permanently restricted support. ASC 958-605-45-4. Upon receipt of the building, the Cancer Institute may need to adjust the valuation of the contribution, based on how the initial fair market value appraisal was made. ASC 958310-55-4. For example, if the valuation to the Foundation was based on the amount of future cash flows from the building, the Cancer Institute must make an adjustment when it receives the contributed building.

CASE 2: On January 1, the Hawaii Cancer Institute has received a promise from the Obama Foundation to receive a building that the Foundation recently appraised at $200,000—but cost it only $125,000. The Institute promised to keep the building “permanently restricted,” i.e., never to sell it and to use it only for its work in helping cancer patients.

After not receiving title by December 30, the Institute inquired as to the status of the promised building. The Foundation stated that water damage to the building (from last year’s flood) has permanently reduced the carrying value of the building to $100,000.

The Foundation had initially hoped to set up a fund drive to help “clean up” the building.

However, both parties have agreed that as of December 31, this fund drive would not materialize and the date to receive the building would remain unknown. How should the Institute now record the promised gift?

CASE 2 SOLUTION: Problem Identification: Whether “permanent” reductions in the value of “promised” assets affect the not-for-profit entity’s valuation of “promised” assets?

Keywords: Restricted contributions, valuation allowances (for doubtful accounts).

Conclusion: The Institute should reduce its valuation for the decline in the value of the contributed receivable. ASC 958-310-35-13. After receipt, the valuation may change because of the nature of the amount or prior fair market value if based on present value.

If the Institute decides that it does not want the building any longer (since it does not wish to spend $100,000 fixing it up), it may decide to reserve and write off the entire balance. Alternatively, if the Foundation removes the permanent restriction upon donation, the Institute can place the asset as an investment—which it can later sell to generate funds for other purposes.

CASE 3: On January 1, the Old Town Heart Association received a $1,000,000 endowment from the Chamber family. Under terms of the gift, the Association must permanently restrict the endowment—but may spend up to half of the interest earned on the gift or half of all profits earned from selling such investments for operating purposes. The Association immediately invested the gift proceeds in some “blue chip” stocks. Afterwards, the Association spent half of the $50,000 dividends earned from the Chamber portfolio for operating purposes. Where in the Statement of Cash Flows (i.e., operating, investing, or financing activities) should the Association report these transactions?

CASE 3 SOLUTION: Problem Identification: In which parts of a Statement of Cash Flows should a not-forprofit Association disclose and classify its activities?

Keywords: Statement of Cash Flows; not-for-profit organization; restricted funds.

Conclusion: The Association should generate a statement of Cash Flows. ASC 958-23005-2. The Association generated operating funds by decreasing the cash invested in assets restricted for endowment purposes. Thus, the Association should record as investing activities the difference between cash used to purchase investments and cash received upon their sale.

CASE 4: On April 15, the City of Old Putz invests its “available” excess cash with an investment broker. The investment broker then purchases 90-day commercial paper from a set of “blue chip” companies. On June 30, the last day of the City’s fiscal year, the City planned to “roll over” the commercial paper when they mature. However, interest rates fell dramatically in late June resulting in a lower value for the “maturing” commercial paper.

More importantly, the City now expects to receive a much lower return on its investment after reinvestment. Should the City make any disclosures or adjustments regarding these transactions?

CASE 4 SOLUTION: Problem Identification: Should a City disclose potential interest rate swings affecting bond values? Should the City remeasure and disclose the value of the maturing commercial paper? If so, what disclosures seem necessary?

Keywords: Not-for-profit, Investments, interest-earning investments.

Conclusion: Entities need not report the effect of changing market values of short-term money market investments in high quality commercial paper. GAS 31, ¶ 22. As such no further disclosures regarding this matter seem necessary. However, the City may wish to report both the amount of funds invested in such securities and its plans to “roll over” these investments.

CASE 5: Mount Pleasant Epilepsy Association is a not-for-profit agency. Joseph Howard is the Chair of its Voluntary Board of Director. He is also the owner of Howard Insurance Company. The Association rents its facilities from Howard Insurance Company. The Company charges the Association $10 per square foot of space per month. This amount is considerably below the City’s average “market” rate of $14 for similar office space. The rental rates have not changed during the five years that the Association has occupied its present location. However, no formal agreement for this rental situation exists. Joseph has “hinted” that “one day” the Company may ask the Association to significantly increase its rental payments or move to another location. What disclosures, if any, should the Association make regarding this situation?

CASE 5 SOLUTION: Problem Identification: Does a related party situation exist between an Association and the chair of its voluntary Board of Directors? Does a capital or operating lease exist for the Association’s rental relationship? What disclosures, if any, should the Association make regarding the lease?

Keywords: Related party transactions, lease, operating lease, capital lease, disclosure.

Conclusion: The Mount Pleasant Epilepsy Association has a potential related party arrangement through the Chair of its Board of Directors. The Association should thus disclose this information—even though the lease terms seem quite favorable. ASC 85010-50-3. However, since the Association engages in a month-to-month lease (i.e., its noncancelable terms are less than one year), per, it need only disclose the terms of the lease.

ASC 958-20-60-15 (expected, but not in the exposure draft version).

CASE 6: The Oakland County Hospital performs lots of work for Medicare and Medicaid patients.

This results in both reimbursement of certain operating costs and some profit.

“Transfers” among related subsidiaries within the Hospital also contain some Medicare and Medicaid “profits.” For example, the pharmacy, nursing and anesthesiology subsidiaries often all participate in a Medicare and Medicaid surgical operation. When the Hospital prepares consolidated financial statements, it asks you whether the Hospital should “eliminate” gains on such transactions—especially if others consider such transactions as dealings with “regulated affiliates.”

CASE 6 SOLUTION: Problem Identification: Should a Hospital eliminate profits on intercompany sales and assets among “controlled” groups that participate in Medicare and Medicaid reimbursement policies?

Keywords: Consolidated financial statements; regulation; affiliates.

Conclusion: A Hospital should not eliminate sales to “regulated affiliates” if the sales price is reasonable, and through the rate-making process, future revenues are expected to equal the sales price from the regulated affiliate’s use of the products or services. ASC 980-810-45-1. Since the Hospital could receive profits on reimbursements on intercompany sales, its financial statements should not eliminate the intercompany profits. ASC 980-10-15-2.

Medicare and Medicaid are excluded because they are contractual-type arrangements between the provider and the government agency responsible to pay for the services provided. ASC 980-10-15-7. Thus, the Hospital should eliminate these inter-entity gains and losses from its consolidated statements—but could report them in the individual group members’ separate financial statements.

CASE 7: The City of Mall uses a June 30th year-end. On March 1, the City hired Frank Sears as its City Manager at an annual salary of $100,000. Frank—like all other employees—earns 12 vacation days per year for the first 10 years with the City.

Thereafter, he earns 18 vacation days per year.

Employees who leave the City receive payment for all vested, unused vacation days.

However, all employees must work for at least six months before they can take any vacation days. The City believes that Frank will be an excellent employee and assumes that he will work past the required six months. Should the City accrue vacation time for the City Manager?

CASE 9 SOLUTION: Problem Identification: Should the City accrue vacation time for an employee who has not yet vested the necessary time to earn vacation time?

Keywords: Compensated absences, vacation pay, and vesting.

Conclusion: Frank’s continued employment with the City is beyond the City’s control. Some employees leave before vesting their vacation time. Thus, the City should not accrue vacation benefits. GASBS 16, ¶ 7. This standard provides vacation leave should be accrued as a liability as the benefits are earned by the employees. However, benefits that are earned but are expected to lapse and not result in compensation to employees should not be accrued as a liability.

After six months, to better match the vacation accrual expense, make a prior-period adjustment in the current period. This adjustment is made even if this amount is immaterial.

AUDITING Cases Case 1: In year 1, Joe Josephs, CPA, reviewed Lander Company’s financial statements.

However, in year 2, the Lander Company hired Tom Holstrum, CPA, to audit its financial statements. Should Tom meet with Joe, and would Joe be considered as a predecessor auditor?

Case 1 Solution: Problem Identification: Is a CPA who reviewed prior period financial statements considered as a predecessor auditor?

Keywords: Review, predecessor auditor.

Conclusion: AU-C 510.05 defines a predecessor auditor and AU-C 210.A27 provides guidance as to discussion with the predecessor auditor. However, a CPA performing compilations and reviews are not predecessor auditors. Nonetheless, Tom may still wish to meet with him to discuss “problem” encountered during this review engagement.

Case 2: Gates Inc. has its reviewed interim financial information included with the audited financial statement. However, after the review the auditor believes that the interim financial information is not prepared in accordance with an applicable financial reporting framework. The review report which references the departure is not presented with the interim financial information that accompanies the audited financial statements.

The engagement partner requests your assistance to research as to the impact on the report of the audited financial statements.

Case 2 Solution: Problem Identification: Are there any modifications needed to the report of the audited financial statements that are accompanied with reviewed interim financial information that depart from an accepted financial reporting framework?

Keywords: Interim financial information, departures from accepted financial reporting framework, audit report modifications.

Conclusion: AU-C 930.40 states that an auditor should include an “other -matter” paragraph in the audit report when reviewed interim financial information that accompanies audited financial statements depart from an accepted financial reporting framework.

Case 3: Mary Howard, CPA, has long audited the Wheat City Grain Company’s financial statements. Much of Wheat City’s assets consist of wheat stored in three of its grain elevators, and the Company maintains perpetual inventory records of the quantity of wheat stored there. Concurrently, on a surprise basis, at different times each month, state grain inspectors also “count” the quantity of wheat found in these elevators—and have found no material differences in the perpetual records for the five years that they have performed this function. To save both time and audit fees, Mary wants to rely on the state inspectors’ counts instead of her making independent counts thereof. Can Mary do this?

Case 3 Solution: Problem Identification: Can a CPA rely on an objective, independent third party (i.e., part of a government agency) to substitute required generally accepted auditing procedures (i.e., observing the counting of the client’s inventory)?

Keywords: Reliance on specialists; inventory observation; outside inventory-taking firm; independence.

Conclusion: First, the concept of independence requires the CPA not to subordinate his or her judgment to an outside party. Next, AU-C 620.07-.13 require auditors to both review the competence, capabilities, and objectivity of the specialist—and to make appropriate tests of the data the specialist provided. In so doing, the auditor can rely on such reports- along as it does not substitute for the CPA’s own work.

Case 4: Johnson & Young, LLP have been requested to be the auditors of Payroll Inc., an outside service company that processes payroll for over 200 clients. In considering the request, Johnson & Young are concerned that they might be required to be independent of user entities serviced by payroll Inc. You have been instructed to research the issue and report back to the partners.

Case 4 Solution: Problem Identification: Does an auditor of a service organization need be independent of the user clients of the service organization?

Keywords: Service organization, service auditor, independence Conclusion: AU-C 402.A22 states that the service auditor need not be independent of user entities.

Case 5: Alex Curtis, during the audit of Landon Company, has determined that the company will be preparing its financial statements on a liquidation basis of accounting

due to the fact that management has decided to liquidate Landon Company at the end of the first quarter of next year. You have determined that this basis of accounting is not

GAAP. As a result, Alex seeks your assistance to determine if Alex can issue an unmodified/unqualified audit report.

Case 5 Solution: Problem Identification: Can an unmodified/unqualified audit report be issued on financial statements prepared utilizing the liquidation basis of accounting?

Keywords: Liquidation, basis of accounting, unmodified report Conclusion: AU-C 9700.01-.02 concludes that an unmodified/unqualified report may be issued on financial statements prepared utilizing the liquidation basis of accounting which is GAAP. Case 6: Hugo Crossman, CPA, issued a review statement for the CUNY Company for last year and a compiled statement for them in the current year. During the current year, Hugo purchased some CUNY securities, which made him lose his independence—a fact noted in his CPA compilation report. Now, the CUNY Company management wants Hugo to issue comparative two year financial statements (last year and this year). Can Hugo re-issue his review report now that he is no longer independent of the CUNY Company?

Case 6 Solution: Problem Identification: Does a subsequent lack of CPA independence impair his or her ability to re-issue prior year’s financial statements when independence was not an issue?

Keywords: Independence; compilation; review; comparative financial statements Conclusion: AR 200.08 (SSARS) states that a continuing accountant who performs a “lower” level of service in a subsequent period can re-issue the prior report. The accountant should, include a separate paragraph attached to his or her latest report that indicates this new, lack of independence and indicate that he or she performed no “update” procedures since last issuing the review report.

Case 7: Joseph Josephs, CPA is auditing the Elder Company’s current year’s annual financial statements and notices that the Company has violated the 2.1 to 1.0 current ratio requirements as part of its debt agreement with the Sunshine Bank. The company’s current ratio is 1.85 to 1. Elder’s management believes (strongly) that it will improve their current ratio during the 90-day grace period. Nonetheless, the bank has the “right” to call in the entire $2 million, five year loan. However, Joseph is not so sure and must issue his report before this grace period expires. Should Joseph qualify his opinion or demand that Elder re-classify this loan as a short-term liability, in light of the above circumstances?

Case 7 Solution:

Problem Identification: Does this present violation warrant re-classifying the loan from a long- to a short-term liability? Should Lander make any additional footnote disclosures? Should Joseph modify his audit report accordingly?

Keywords: Callable debt; audit reports (qualified or adverse); contingencies.

Conclusion: Per the FASB Codification 470-10-45-11, Elder needs to receive a waiver from the creditor or develop other evidence that the bank will not call this loan. These circumstances do not appear to be an uncertainty since they do not involve matters to be resolved at a later date. Thus, if Joseph disagrees with Elder’s decision, he should issue a qualified (“except for”) or adverse audit opinion.

Case 8: In auditing Crispy Inc., the auditor has determined that certain information that is not required by an applicable financial reporting framework, has been included in the company’s basic financial statements which is clearly differentiated and identified. The auditor seeks your assistance to determine is such information need be audited and included in the audit report?

Case 8 Solution: Problem Identification: Can information that is included in the basic financial statements, which is not required, be identified and unaudited?

Keywords: Reporting on financial statements, other information, accompanying information.

Conclusion: AU-C 700.59 and 700.A61-62 state that information that cannot be clearly differentiated need be covered by the auditor’s opinion. Differentiated information can be reported as unaudited.

Case 9: You are auditing the financial statements of Air Service Inc., an airplane wholesaler that purchases various types of corporate jets for sale to different companies or individuals. Prior to the sale of an airplane, Air Service utilizes the jet for charter service. In reviewing the financial statements, you noticed that Air Service reports these jets before selling them as part of fixed assets and depreciates such planes. The engagement partner questions such accounting and requests that you research this issue as to the proper treatment for these jets used in the chartering service.

Case 9 Solution: Problem Identification: The issue in this case is how the planes used in the chartering business should be accounted for—either as inventory or fixed assets which should be depreciated.

Keywords: Inventory, assets held for sale.

Conclusion: Per the FASB Codification ASC 330-10-05-2, the “definition of inventory” one would conclude that the primary use of the jets would determine their treatment in Air Service’s financial statements. Since the jets are held primarily for sale, and the chartering is only a temporary use, the jets should be listed as inventory (current asset) and should not be depreciated.

Tax Problems and Cases Tax Problem 1. Identify the general content of each of the following Internal Revenue Code sections: a. §274(d)(1) b. §751(b)(3)(A) c. §1221(a)(7) Tax Problem 1. Solutions: a. §274(d)(1) – no deduction for travel expenses unless substantiated b. §751(b)(3)(A) – substantially appreciated inventory defined c. §1221(a)(7) – capital asset does not include a hedging transaction

Tax Problem 2. Identify the general contents of each of the following subchapters and parts of the Code: a. Subtitle A, Chapter 1, Subchapter O b. Subtitle C – employment taxes c. Subtitle F, Chapter 67, Subchapter B Tax Problem 2. Solutions: a. Subtitle A, Chapter 1, Subchapter O – gain or loss on disposition of property b. Subtitle C – employment taxes c. Subtitle F, Chapter 67, Subchapter B – interest on overpayments under procedure and administration Tax Problem 3. List the major Code section for the following topics: a. Charitable deductions b. Accrual accounting for deductions c. Foreign income exclusion

Tax Problem 3. Solutions: a. Charitable deductions - 170 b. Accrual accounting for deductions - 461 c. Foreign income exclusion -911

Tax Problem 4. List the following topics for IRS Publications or Form: a. IRS Publication 17 b. IRS Publication 334 c. Form 941 Tax Problem 5. Solutions: a. IRS Publication 17 – Your Federal Income Tax b. IRS Publication 334 – Tax Guide for Small Business (For individuals who use schedule C or C-EZ) c. Form 941 – Employer's Quarterly Federal Tax Return

Tax Problem 5. Identify the topic of the following Treasury Regulations, Revenue Rulings, or Revenue Procedures: a. Treas. Reg. 1.385-4T e. Rev. Proc. 2017-29, 2017-14 I.R.B. 1065 c. Rev. Rul. 68-609, 1968-2 C.B. 327 Tax Problem 5 Solutions. a. Treas. Reg. 1.385-4T - treatment of consolidated groups e. Rev. Proc. 2017-29, 2017-14 I.R.B. 1065 – depreciation tables c. Rev. Rul. 68-609, 1968-2 C.B. 327 - fair market value of intangible assets of a business Tax Cases for Writing Memos - Instructions: In writing a tax memo begin the discussion of the law with at least one paragraph on the relevant Code language. Pinpoint the location of the relevant language as precisely as possible. After each relevant Code section, follow with the relevant Treasury Regulations. Then briefly in separate paragraphs briefly describe any relevant cases or Revenue Rulings. Write clearly and concisely.

For each of the following problems, do not just answer the question asked in the problem.

Instead, write a memo identifying the legal issue(s), conclusion, list of relevant authorities, discussion of the law, and the application of the law. Use these subheadings, as it is not enough just to describe the law. The most important parts of the memo are the issue statement(s) and the application of the law to the problem facts, which is sometimes contained under the heading of reasoning. The application should integrate reference to every source of law previously discussed.

Tax Case 1. When Gross Income is Accrued (Basic) Taxpayer is a securities firm. Taxpayer uses the accrual method of accounting. Taxpayer executes stock trades and performs settlement functions. Settlement functions include recording the sale and confirming it with the customer. Trades made on December 28, 20X5, until the end of the month are not settled until January of 20X6. Taxpayer made $1,000,000 of net commissions from these trades in late December. Since the security is not credited to the customer’s account until settlement date, taxpayer wants to declare the income on the settlement dates in 20X6. Taxpayer does not receive the money until January 20X6. Advise the taxpayer.

Tax Case 1 Solution.

ISSUE: Whether an accrual basis securities firm has gross income under section 451(a) on the trading date or in the next year on the settlement date when all the work is performed, payment is due, and money received?

CONCLUSION: The trading date is the date determining gross income from net commissions on securities because all the events have occurred then which fixes the right to receive the income.

DISCUSSION OF LAW: Gross income includes commissions. § 61(a)(1). Gross income is included in the taxable year received, unless the method of accounting is properly accounted for in a different period. § 451(a). The accrual method generates income when all the events have occurred which fixes the right to receive such income and amount thereof is determinable with reasonable accuracy. Reg. § 1.451-1(a).

Taxpayer was a securities company declaring income from trades on the settlement date. The Tax Court held that sales contract on the trading date was a condition precedent that fixed the T’s right to receive the income. The settlement provided conditions subsequent, so that the settlement was irrelevant to gross income determination. Charles Schwab Corp v. Commissioner, 107 T.C. 282 (1996).

APPLICATION:

Taxpayer has $1,000,000 of gross income for the net commissions. § 61(a)(1).

This gross income is included in taxable year 20X5 because it is accounted for under the accrual method of accounting. Sec. 451(a). The accrual method generates income for the taxpayer when the trading has occurred, because at that time all the events have occurred which fixes the right to receive such income and amount of commissions is determined with reasonable accuracy. Reg. § 1.4511(a). As was the case in Charles Schwab Corp v. Commissioner, 107 TC 282 (1996), taxpayer’s settlement functions were conditions subsequent, so that the settlement date was irrelevant to the determination of gross income.

Tax Case 2: Stock Purchased by an Employee (Intermediate) Stacey became an employee of DotGismo, Inc., a privately held firm. On December 15, 20X3, Stacey was allowed to buy 20,000 shares of DotGismo stock for $40,000 dollars.

At that time when Stacey bought the stock, each share was worth $2. DotGismo retains the right to repurchase each share for $2 original purchase price if Stacey leaves DotGismo at any time during the next two years for any reason. DotGismo stock increased to $5 per share in December 15, 20X5, when the two-year restriction ended.

Stacey sold the stock on January 18, 20X6 for $9 per share, after the announcement of a new patent for DotGismo. Advise Stacey roughly how much tax must be paid and for what year(s). Assume Stacey is in the 35% tax bracket for ordinary income and 15% for long term capital gains.

Tax Case 2. Solution ISSUE: Whether a taxpayer who did not buy the employer stock at a discount, needed to make a section 83(b) election in order to obtain capital gain treatment when she sells the stock.

CONCLUSION: Any failure to make a section 83(b) election creates gross income from the restricted stock when the restriction lapsed in 20X5; the gain is ordinary income measured by the FMV less the purchase cost basis.

DISCUSSION OF THE LAW: Gross income includes compensation for services under section 61(a)(1) and gains from the sale of property under sec. 61(a)(3).

Property having a substantial risk of forfeiture which is transferred in connection with the performance of services is gross income, as measured by its fair market value upon the removal of the substantial risk of forfeiture, less any price paid for the stock. § 83(a). Thus, property received in connection with the performance of services is not taxed under sec. 83(a) until it has substantially vested. Reg. § 1.83-1(a)(1). Substantial risk of forfeiture is defined as rights to full enjoyment of such property which are conditioned upon future performance of services. §

83(c)(1). The holding period for stock having a substantial risk of forfeiture begins when the restriction is lifted. § 83(h).

Section 83(b)(1) provides an election to include in gross income in the year of transfer, the excess of the fair market value over the amount paid for the property.

One must make the election not later than 30 days after the transfer. § 83(b)(2).

An employer made a stock option plan available for key employees. The U.S. Supreme Court held that a purchase from employer for stock options is compensation for services, since it is not a gift. Commissioner v. LoBue, 351 U.S. 243 (1956).

Employee purchased employer’s restricted stock when the amount paid for the stock equaled its full fair market value. The Tax Court held that section 83 applies to all restricted stock that is transferred for services. Unless the taxpayer elected at time of purchase to include income difference between purchase price and fair market value, taxpayer must recognize ordinary income for any appreciation in value. Alves v. Commissioner, 734 F.2d 478 (9th Cir. 1984).

APPLICATION OF THE LAW: Stacey’s gross income includes her compensation for services under section 61(a)(1). Stacey’s purchase of Gismo stock is transfer of property in connection with the performance of services, because the stock was not widely available for purchase. Commissioner v. LoBue, 351 U.S. 243 (1956). Stacey’s stock had a substantial risk of forfeiture under section 83(c)(1) because her employer could buy it back.

Assuming that Stacey did not make a section 83(b) election when she purchased her employer’s stock, Stacey has income in 20X5 when the rights in her stock were substantially vested under Reg. § 1.83-1(a)(1). Stacey’s gross income in 20X5 is $60,000 measured by its fair market value upon the removal of the substantial risk of forfeiture, less the price paid for the stock (20,000 shares having a $5 per share FMV less $2 per share paid for the stock). § 83(a). Stacey must recognize ordinary income for the $60,000 appreciation in the stock’s value.

Alves v. Commissioner, 734 F.2d 478 (9th Cir. 1984).

Stacey’s gross income in 20X6 when she sells the stock is $80,000 (20,000 shares times [$9 per share FMV less $5 per share basis ($2 cost + $3 prior gain recognized). The $80,000 is short term capital gain since the holding period for Stacey’s stock starts when the restriction lapsed under sec. 83(f). Stacey pays $28,000 of tax in 20X6 (plus the $21,000 of tax in 20X5).

However, if Stacey made Section 83(b)(1) election to include in gross income in the year of transfer, the excess of the fair market value over the amount paid for the property, which was -0-, she must have made the election not later than 30 days after the transfer. Sec. 83(b)(2). Then she does not have additional income until 20X6, when she sells the stock. § 61(a)(3). The $140,000 gross income (20,000 shares times [$9 per share selling price less $2 basis]) is long term capital

gain. Stacey should pay about 21,000 of taxes. (15% LTCG rate).

Tax Case 3: Business Deductions (Intermediate) For the past two years, Minsu, a Korean American, worked as a high school physical education teacher. He was also a body-builder and a part-time graduate student in educational technology at State University. As part of preparing a masters thesis, Minsu decided to participate in Arnold’s World Body-building training program and analyze advanced technology used to help students absorb physical education. Arnold’s training program had a regular faculty, curriculum, an enrolled body of students, and advanced technology in its gym equipment.

Minsu earned $4,000 during the fall 20X5 as a body-builder; he came in second in the state contest. Minsu paid $5,000 in spring 20X5 for tuition related to his masters degree at State University for one class on advanced computer technology and another $3,000 to participate in the gym. How much can Minsu deduct? Minsu knows about relevant educational tax credits and wants you to focus just on the deductions.

Tax Case 3: Solution ISSUE: Whether a training program which has elements of personal and business activities qualifies as a business expense deduction under section 162(a) or a hobby expense under sec. 183.

CONCLUSION: The cost of a graduate degree or the body-building training program is not deductible if one is not yet in the trade or business when the expense arose.

DISCUSSION OF THE LAW: Section 162(a) allows a deduction for all ordinary and necessary expenses incurred in carrying on a trade or business. Educational expenses are never deductible if the education is part of a study program that will lead to taxpayer qualifying for a new trade or business, Reg. § 1.162-5(b)(3), or if the study is required in order to meet the minimum educational requirements for qualification in the job. Reg. § 1.162-5(b)(2). If the education passes these two tests then the educational expense must either (1) maintain or improve existing skills required in the individual's trade or business or (2) meet the express requirements of the employer to retain his or her employment status. Reg. § 1.162-5(a).

For an employee, a change of duties does not constitute a new trade or business if the new duties involve the same general type of work as performed at the individual's present employment. Although additional education may qualify a taxpayer for a position with new duties, the education does not qualify the

taxpayer for a new trade or business if the new duties are in the similar type of work. Reg. § 1.162-5(b)(3).

Taxpayer had graduate educational expenses in educational psychology as part of a college's adult education program. The education was part of a degree program that led to employment as a high school guidance counselor. The Tax Court held that these educational expenses were deductible business expenses in Schwerm v.

Commissioner, T.C. Memo 1986-16. The Tax Court agreed that the taxpayer was in the trade or business of teaching and found that the graduate education did not qualify the taxpayer for a new trade or business. Although the degree qualified the taxpayer for high school counseling, the court distinguished the result as merely a change of duties involving the same general work of teaching and related duties.

A master's degree was not required to meet the minimum educational requirements for the job. The education in educational psychology helped the taxpayer maintain her job skills in education.

The Tax Court denied a deduction for earning a masters degree in social work for a teacher of learning-disabled students, reasoning that it qualified her for a new trade or business of entering social work fields. Reisinger v. Commissioner, 71 T.C. 568 (1979).

Deductions attributable to a hobby are deductible only to the extent that the gross income derived from such activity exceeds the deductions that would be allowable under the tax law without regard to whether the activity is engaged in for profit. Sec. 183(b)(1). Activities not engaged for in profit are defined with nine criteria in Reg. sec. 1.183-2. Hobby expenses are subject to the 2% floor on miscellaneous items deductions. § 67(b). Personal living expenses are not deductible. § 262(a).

APPLICATION OF THE LAW: Minsu’s educational expenses are not deductible if the education is part of a study program that will lead to qualifying for a new trade or business. Reg. § 1.1625(b)(3). The fact that the education helps Minsu maintain or improve existing skills required in the individual's trade or business is not enough. Reg. § 1.1625(a).

Minsu’s case of earning a masters degree in a related but slightly different field is similar to the taxpayer who was a teacher of learning-disabled students and was earning a masters degree in social work. Reisinger v. Commissioner, 71 T.C. 568 (1979). Applying the rationale in that case, Minsu’s educational technology program could qualify him for a new trade or business in technology related careers.

Although Minsu might argue that he will have a mere change in duties after earning a masters degree, similar to a masters in counseling and guidance for a teacher under Schwerm v. Commissioner, T.C. Memo 1986-16. However, that

case appears distinguishable because of the threshold test that it could qualify Minsu for a new trade or business.

The training program at the gym was an activity that appears more as one not engaged for in a trade or business, applying the factors of a hobby under Reg. § 1.183-2. Thus, Minsu deductions attributable to the hobby of body-building are deductible only to the extent that the gross income derived from such activity exceeds the deductions that would be allowable under the tax law without regard to whether the activity is engaged in for profit. § 183(b)(1). Although gym costs are normally nondeductible personal living expenses under sec. 262(a), Minsu should be able to deduct $3,000 of the costs (subject to the limitations of sec.

67(b), up to the $4,000 earnings from the body-building contest).

Tax Case 4: Deduction for Foreign Travel (Intermediate) Sylvia is a professor in business at the University of Hawaii. She went on sabbatical for an academic year to take courses in Chinese at National Taiwan University in Taipei, Taiwan, to expand her knowledge of international business and ability to conduct research in a foreign language. On weekends and during the three-week winter break Sylvia went sight-seeing by herself around the island. However, one time she gave a lecture in Tainan, Taiwan. Sylvia has documented her expenses and saved her receipts.

Advise Sylvia on the tax consequences.

Tax Case 4. Solution: ISSUE: How much of a professor’s foreign travel expenses while taking courses at a foreign university are deductible after considering the disallowance limitations on travel expense deductions under Sec. 274(c).

CONCLUSION: Foreign travel expenses are generally deductible, when one is doing more than mere travel for educational purposes. However, extra traveling expenses around the island of Taiwan during the winter break and on weekends are not deductible when one did not have business responsibilities, such as a lecture to present.

DISCUSSION OF LAW: Section 162(a)(2) allows a deduction for all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including traveling expenses while away from home in the pursuit of a trade or business.

If travel expenses are incurred for both business and other purposes, the travel expenses are deductible only if the travel is primarily related to the taxpayer's trade or business. Reg. § 1.162-2(b)(1).

Section 274(c)(1) requires an allocation of expenses for foreign travel pursuant to the regulations. The exception under § 274(c)(1)(B) applies if the time not attributable to the trade or business outside the U.S. is less than 25% of the total time on business. Reg. § 1.274-4(d)(2) requires a daily allocation for calculating nonbusiness activity constituting 25% of travel time. Travel expenses are deemed entirely allocable to business activity, if the individual incurring the expenses does not have substantial control over the trip arrangements. Reg. § 1-274-4(f)(5)(i).

No deduction is allowed for travel as a form of education. § 274(l)(2). The Ninth Circuit did not disallow a teacher’s extension course travel expenses to Southeast Asia because the courses required attending lectures by university professors, tours of related sights, and significant readings. Ann Jorgensen, RIA TCMemo ¶ 2000-138 (9th Cir. 2000).

Taxpayer must substantiate the travel expense by adequate records or sufficient evidence, or the travel expenses are disallowed. § 274(d)(1).

Business meals are deductible by only 50% of the cost. § 274(n).

APPLICATION OF LAW: Sylvia’s educational expenses in Asia included more than just disallowed education expenses under Sec. 274(l)(2). Similar to a teacher’s deductible extension course travel to Southeast Asia in Ann Jorgensen, RIA TCMemo ¶ 2000-138 (9th Cir. 2000), Sylvia had significant business responsibilities in taking classes at National Taiwan University to enhance her regular teaching responsibilities at the University of Hawaii.

Sylvia can establish a business purpose for the course work by integrating some of her new knowledge into her activities of teaching and researching international business. Since Sylvia has travel expenses are incurred for both business and other purposes, the travel expenses are deductible only if the travel is primarily related to the taxpayer's trade or business. Treas. Reg. § 1.162-2(b)(1).

Section 162(a)(2) allows Sylvia to deduct all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including traveling expenses while away from home in the pursuit of a trade or business.

Sylvia need not allocate the foreign travel expenses under section 274(c)(1) because the exception under sec. 274(c)(1)(B) applies that the time that she spent not attributable to the trade or business outside the United States is less than 25% of the total time on business. Thus, reg. § 1.274-4(d)(2) is not applicable to Sylvia’s travel.

Instead, the business travel expenses while Sylvia’s classes are in session are deemed entirely allocable to business activity, because Sylvia did not have substantial control over the arrangements of the trip under Reg. § 1-274-4(f)(5)(i).

Sylvia’s documented records should overcome the Section 274(d)(1) substantiation requirements. Sylvia can deduct her travel, lodging and 50% of the business meals. § 274(n).

Tax Case 5: Income Sourcing – International Tax (Advanced) Hidetoshi was a world-renowned rock star from NewCountry. Sony-USA Records contracted with Hidetoshi to produce records. Sony-USA Records retained all intellectual property rights in the recordings. The contract granted Hidetoshi payments or “royalties” based upon future sales of recordings. Hidetoshi paid taxes on the payments in NewCountry as royalties. The U.S.-NewCountry treaty exempts royalties from tax in the U.S. However, NewCountry tax treaty, did not define royalties or compensation for personal services. The IRS has told Hidetoshi, his contract with Sony-USA generates personal service income in the United States. Advise Hidetoshi.

Tax Case 5. Solution: ISSUE: Whether a foreign taxpayer’s music contract with a U.S. subsidiary which granted taxpayer “royalties,” generates personal service income taxable in the United States under sec. 863(a)(3).

CONCLUSION: A recording contract generates personal service income if taxpayer has no intellectual property rights.

DISCUSSION OF THE LAW: Personal service income is sourced according to the location in which the services were performed. Services performed in the U.S. are U.S. source income. § 861(a)(3). The “commercial traveler” exception is foreign-source income if the recipient is a non-resident alien who is in the U.S. for 90 days or less during the tax year, the compensation does not exceed $3,000 for the services performed in the U.S., and the services performed are not effectively connected with a U.S. trade or business. § 863(a)(3).

Royalties from tangible property located outside the U.S. are foreign source income. § 862(a)(4). The location of royalties attributable to the use of intangible property (customer based-intangibles) are sourced according to the country in which the property producing the income is used. Rev. Rul. 72-232, 1972-1 C.B. 276.

In Ingram v. Bowers, 57 F.2d 65 (CA-2, 1932), the issue was whether income received from master records cut by taxpayer’s deceased spouse was royalty income or personal service income. The master records were used in foreign countries (so royalty income would qualify as foreign source), while the records had been cut in the U.S. (so personal service income would qualify as U.S.

source). The Second Circuit Court of Appeals determined that taxpayer had personal service income from the master records.

Broadcast rights in a foreign country of a live boxing match held in the U.S. were determined to be licensed, rather than sold. Rev. Rul. 84-78, 1984-1 C.B. 173.

The license resulted in the income being characterized as foreign-source royalty income since the rights were for use in a foreign country.

A record company contracted with the Foreign Taxpayer to produce recordings.

The company retained all intellectual property rights in the recordings. The contract granted Taxpayer “royalties” based upon future sales of the recordings.

The applicable tax treaty did not define royalties or compensation for personal services. The Tax Court in Boulez v. Commissioner, 83 T.C. 584 (1984), decided the contract was intended as a contract for personal services. Although the payments were based on future sales, existence of taxpayer’s property right is fundamental for the purpose of determining whether royalty income exists. Under applicable (U.S.) intellectual property law, Taxpayer owned no intellectual property rights that he could license because the recordings were works for hire and therefore generated earned income from personal services. Because taxpayer performed his services in the U.S., his income was U.S. source and taxable in the United States.

APPLICATION OF THE LAW: Hidetoshi’s contract is service income. Similar to the case in Ingram v. Bowers, 57 F.2d 65 (2d Cir. 1932), the issue for Hidetoshi was whether income received was royalty income or personal service income. In both cases, the items were used in foreign countries, while they were produced in the U.S. Thus, the same conclusion arises that Hidetoshi’s income generated is personal service income.

Hidetoshi’s case is factually similar to Boulez v. Commissioner, 83 T.C. 584 (1984). In both cases, a record company contracted with the Foreign Taxpayer to produce recordings. The record company retained all intellectual property rights in the recordings. Because Hidetoshi owned no intellectual property rights, no royalty payment existed; instead the recordings were compensation for services.

Given that Hidetoshi performed his services in the U.S., his income was classified as U.S. source. § 861(a)(3).

Hidetoshi’s case is distinguishable from the facts in Rev. Rul. 84-78, 1984-1 C.B. 173, because no license or intellectual property was produced for Hidetoshi.

Thus, the characterization of the income is different. Hidetoshi does not qualify for the “commercial traveler” exception when the compensation exceeds $3,000 for the services performed in the United States. § 863(a)(3). Since Hidetoshi’s income is not royalties, Sec. 862(a)(4) and Rev. Rul. 72-232, 1972-1 C.B. 276, are not applicable.

Tax Case 6: Contingent Liabilities in a Tax-Free Transfer (Advanced) Xco an accrual basis taxpayer has various lines of businesses. One business is a gas station. The land underneath the gas station was not contaminated when Xco purchased it. However, the land now has potential soil and groundwater problems (environmental liabilities). Xco engaged in a section 351 tax-free exchange transferring the gas station to a new subsidiary Sco in exchange for the stock of Sco and assumption of the environmental liabilities. Before the transfer, Xco did not take any environmental remediation efforts to clean up the soil and groundwater problems associated with the gas station. One year later Sco paid $100,000.

Tax Case 6. Solution: ISSUE: Whether the transfer of contingent liabilities in a tax-free incorporation might create recognized gain under sec. 357(a).

CONCLUSION: No gain is recognized from contingent liabilities, however, they can effect shareholder’s basis in the stock under sec. 358(h).

DISCUSSION OF LAW: Sec. 351(a) provides for tax-free exchanges of property contributed to a corporation when the transferors receive 80% or more of the corporation’s stock.

However, if other property or money, known as boot, is involved in the transaction, gain is recognized. § 351(b).

Liabilities included in the transferred property are generally not considered as boot. Sec. 357(a). However, gain is recognized on liabilities transferred if either the liabilities exceed the adjusted basis [§ 357(c)(1)] or represent bad purpose liabilities for tax avoidance purposes. § 357(b).

The basis of the property received is determined under sec. 358(a)(1) as a carryover basis of the property exchanged, decreased by boot received, and increased by gain recognized. However, for purposes of sec. 358 basis, the liabilities assumed are treated as boot received. § 358(d)(1).

Rev. Rul. 95-74, 1995-2 CB 36, removed contingent environmental liabilities from under sec. 357(c)(1), because they had not given rise to a deduction nor effected basis. So, contingent liabilities assumed, would not trigger gain to the extent such liabilities exceeded the adjusted basis of property contributed. § 357(c)(1).

Section 358(h)(3) includes contingent liability in the definition of liability for purposes of determining whether basis exceeds the fair market value, so that a

reduction in basis should occur. Section 358(h) is aimed at contingent-liabilities tax shelters; so that § 358(h) reduces the basis of stock received by the amount of liabilities assumed but not below its FMV. However, section 358(h) does not apply if either the entire trade or business or substantially all of its assets are contributed. § 358(h)(2).

APPLICATION: Xco contributed property to a corporation under Sec. 351(a) for a tax-free exchange for receiving Sco’s stock. Xco’s liabilities included in the transferred property are generally not considered as boot, Sec. 357(a), so no gain is recognized under sec. 351(b). However, if Xco’s liabilities exceed its adjusted basis, gain is recognized on liabilities transferred under sec. 357(c)(1). No facts on Xco indicate that the contingent liabilities represent bad purpose liabilities for tax avoidance purposes. § 357(b).

The basis of the property received by Xco is determined under sec. 358(a)(1) as a carryover basis of the property exchanged, decreased by boot received, and increased by gain recognized. However, for purposes of Xco’s sec. 358 basis, the liabilities assumed are treated as boot received, Sec. 358(d)(1), except for contingent liabilities which Rev. Rul. 95-74, 1995-2 CB 36, removed from section 357(c)(1), because they had not given rise to a deduction nor effected basis. So, Xco’s contingent liabilities assumed by Sco, would not trigger gain to the extent such liabilities exceeded Xco’s adjusted basis of property contributed. § 357(c)(1).

However, Xco’s contingent liabilities under Sec. 358(h)(3), are used to determine whether basis exceeds the fair market value, so that a reduction in basis should occur. However, sec. 358(h) does not apply if either the entire trade or business or substantially all of its assets are contributed.

MISC. RESEARCH CASES MISC. CASE 1. Apple Proxy Case In 2015, the proxy vote for Apple’s annual meeting had six proposals: 1. The election of the directors, 2. The ratification of the auditor, 3. An advisory vote on executive compensation (“say on pay”), 4. An amendment to the employee stock purchase plan, 5. Shareholder proposal regarding renewable energy, and 6. Shareholder proposal regarding proxy access. a. Where is this proxy statement filed?

b. Find the results of this proxy vote and explain where you found it. What percent of the shareholders voted in favor of the executive compensation and what percent voted in favor of the shareholder proposal on proxy access?

MISC. CASE 1. SOLUTION a. Proxies are filed with the SEC. b. ProxyMonitor.org is a unique, publicly available database that tracks shareholder proposals in real time. This database shows 75% of the shareholders voted in favor of the executive compensation and 40% of the shareholders voted in favor of the shareholder proposal on proxy access.

MISC. CASE 2. Fifth Largest Fortune 500 Company a. Identify the five largest “Fortune 500” companies for 2017. b. Identify the primary basic industry for the fifth largest company. c. What does the company identify as its core business segments? d. Where is this company headquartered? e. Provide the market cap, revenue, and net income for that company. f. Did the revenue increase or decrease from 2015? g. Who were the primary competitors for this company? h. What happened to the company’s cash and cash equivalents during 2016 and 2017? i. How does the company define cash equivalents? j. Try to identify the reason for the change.

MISC. CASE 2 SOLUTION: a. Walmart, Berkshire Hathaway, Apple, Exxon Mobile, McKesson. b. McKesson, the fifth largest company is in the health care industry. c. The company identifies its two core business segments as distribution solutions and technology solutions. d. The company is headquartered in San Francisco. e. Its market cap was almost $35 billion, the revenue as almost $200 billion, and net income as just over $5 billion. f. The company’s revenue increased almost $20 billion from 2015. g. The company’s cash and cash equivalents declined. i. The company defines cash equivalents in financial note #1 on significant accounting policies as money market instruments with an original maturity of 3 months or less. j. The company completed various acquisitions using cash.

MISC. CASE 3. Finding an Article on Corporate Governance Challenges a. Find a reliable article on corporate governance challenges and priorities for the current year. Summarize the top three challenges or priorities. b. Discuss why you believe the article is reliable? Are there factors that could make the article and its contents more reliable?

MISC CASE 3. SOLUTION:

a. Students might find different articles on corporate governance, a subject that has become more important in 2017 for the CPA exam. b. Check whether the student identified the publication as either from the leading financial press or a peer reviewed journal or a leading association on corporate governance, such as the NACD, the National Association of Corporate Directors. See if the student commented on the author, such as a leading multinational accounting firm.

For example, in 2016, KPMG published a pamphlet on the insights from the 12th annual audit committee issues conference, a meeting sponsored by the NACD. Governance issues include keeping innovation and strategy in sync, shareholder activists as change agents, and cyber-security challenges.

MISC. CASE 4. Automotive Industry and Tesla a. Identify the three largest companies in the worldwide automobile industry. What is the source for your listing and what is size based on (market cap or number of automobiles sold or some other dimension? b. Examine the SEC filings for Tesla in 2016. Who was the Chief Accounting Officer who signed the annual report? In 2017, what did Tesla produce? What were the biggest risks identified by Tesla?

MISC. CASE 4. SOLUTION: a. The three largest companies in the automotive industry are Toyota, General Motors, Volkswagen, according to Forbes in September 2016, based on the number of cars produced. However, one might approach the question by market capitalization. In April 2017, Tesla briefly became the most valuable American automotive manufacturer, as measured by its market capitalization. b. Tesla risk factors include numerous risks related to the business and industry.

Litigation concerns included litigation related to the acquisition of Solar City. Tesla’s Chief Accounting Officer was Eric Branderiz. In the second half of 2017, Tesla started producing the Model 3, a car for the mass market.

MISC. CASE 5. Dodd-Frank and Corporate Governance Reforms a. In 2017, Congress debated repealing Dodd-Frank. What were four major provisions in Dodd-Frank that impacted corporate governance? b. Has Congress repealed Dodd-Frank? How else could a roll-back on the law occur?

MISC. CASE 5. SOLUTION: a. Four major provisions in Dodd-Frank that impacted corporate governance were proxy access by shareholders, majority voting for director elections, “say on pay” vote by shareholders, and pay ratio disclosure. Additional corporate governance provisions include disclosing why a company has chosen to combine or separate the Board chairman and CEO positions, shareholder say on golden parachutes, independence standards for the compensation committee, disclosure on pay for performance between executives and the company’s financial performance, compensation clawbacks following a financial restatement.

b. On June 8, 2017, the House passed the Financial Choice Act which would repeal Dodd-Frank. As of July 9, 2017, the Senate has not taken any action. Discussion also exists about reversing much of Dodd-Frank through administrative regulatory reforms.