Question 1
Assignment 3: Capstone Research Project Assume you are the partner in an accounting firm hired to perform the audit on a fortune 1000 company. Assume also that the initial public offering (IPO) of the company was approximately five (5) years ago and the company is concerned that, in less than five (5) years after the IPO, a restatement may be necessary. During your initial evaluation of the client, you discover the following information: - The client is currently undergoing a three (3) year income tax examination by the Internal Revenue Service (IRS). A significant issue involved in the IRS audit encompasses inventory write-downs on the tax returns that are not included in the financial statements. Because of the concealment of the transaction, the IRS is labeling the treatment of the write-down as fraud. - The company has a share-based compensation plan for top-level executives consisting of stock options. The value of the options exercised during the year was not expensed or disclosed in the financial statements. - The company has several operating and capital leases in place, and the CFO is considering leasing a substantial portion of the assets for future use. The current leases in place are arranged using special purpose entities (SPEs) and operating leases. - The company seeks to acquire a global partner, which will require IFRS reporting. - The company received correspondence from the Securities and Exchange Commission (SEC) requesting additional supplemental information regarding the financial statements submitted with the IPO. Write an eight to ten (8-10) page paper in which you: 1. Evaluate any damaging financial and ethical repercussions of failure to include the inventory write-downs in the financial statements. Prepare a recommendation to the CFO, evaluating the negative impact of a civil fraud penalty on the corporation as a result of the IRS audit. In the recommendation, include essential internal control procedures to prevent fraudulent financial reporting from occurring, as well as the major obligation of the CEO and CFO to ensure compliance. 2. Examine the negative results on stakeholders and the financial statements of an IRS audit which generates additional tax and penalties or subsequent audits. Assume that the subsequent audit and / or additional tax and penalties result from the taxpayer?s use of an inventory reserve account, applying a 10 percent reduction to inventory over three (3) years. 3. Discuss the applicable federal tax laws, regulations, rulings, and court cases related to the inventory write-downs, and explain the specific relevance of each to the write-down. 4. Research the current generally accepted accounting principles (GAAP) regarding stock option accounting. Evaluate the current treatment of the company?s share-based compensation plan based on GAAP reporting. Contrast the financial benefits and risks of the share-based compensation stock option plan with the financial benefits and risks of a share-based stock-appreciation rights plan (SARS). Recommend to the CFO which plan the company should use, and provide the correct accounting treatment for each. 5. Research the reporting requirements for lease reporting under GAAP and International Financial Reporting Standards (IFRS). Based on your research, create a proposal for future lease transactions to the CFO. Within the proposal, discuss the use of off-the-balance sheet financing arrangements, capital leases, and operating leases, and indicate the related business and financial risks of each. 6. Create an argument for or against a single set of international accounting standards related to lease accounting based on the global market and cross border leases of assets. Examine the benefits and risks of your chosen position. 7. Examine the major implications of SAS 99 based on the factors you discovered during the initial evaluation of the company. Provide support for your rationale. 8. Analyze the potential for a material misstatement in the financial statements based on the issues identified in your initial evaluation. Make a recommendation to the CFO for the issuance of restated financial statement restatement. Identify at least three (3) significant issues that can result from the failure to issue restated financial statements. 9. Examine the economic effect of restatement of the financial statements on investors, employees, customers, and creditors. 10. Use five (5) quality academic resources in this assignment. Note: Wikipedia and other Websites do not qualify as academic resources. Your assignment must follow these formatting requirements: - Be typed, double spaced, using Times New Roman font (size 12)
Question 2
77. You have been assigned to compute the income tax provision for Motown Memories, Inc. (MM) as of December 31, 2011. The Company?s federal income tax rate is 34%. The Company?s Income Statement for 2011 is provided below: Motown Memories, Inc. Statement of Operations at December 31 2011 Net sales $50,000,000 Cost of sales 28,000,000 Gross profit 22,000,000 Compensation 2,000,000 Selling expenses 1,500,000 Depreciation and amortization 4,000,000 Other expenses 500,000 Total operating expenses 8,000,000 Income from operations $14,000,000 Interest and other income 1,000,000 Income before income taxes $15,000,000 You have identified the following permanent differences: Interest income from municipal bonds: $50,000 Nondeductible meals and entertainment expenses: $20,000 Domestic production activities deduction: $250,000 Nondeductible fines: $5,000 MM prepared the following schedule of temporary differences from the beginning of the year to the end of the year: Motown Memories, Inc. Temporary Difference Scheduling Template BOY Beginning Current EOY Ending Taxable (Favorable) Cumulative Deferred Year Cumulative Deferred Temporary Differences T/D Taxes (@ 34%) Change T/D Taxes (@ 34%) Non-current Accumulated depreciation (8,000,000) (2,720,000) (1,000,000) (9,000,000) (3,060,000) BOY Beginning Current EOY Ending Deductible (Unfavorable) Cumulative Deferred Year Cumulative Deferred Temporary Differences T/D Taxes (@ 34%) Change T/D Taxes (@ 34%) Current Allowance for bad debts 200,000 68,000 50,000 250,000 85,000 Reserve for warranties 100,000 34,000 20,000 120,000 40,800 Inventory ?263A adjustment 240,000 81,600 60,000 300,000 102,000 Total current 540,000 183,600 130,000 670,000 227,800 Non-Current Deferred compensation 50,000 17,000 10,000 60,000 20,400 Accrued pension liabilities 3,000,000 1,020,000 250,000 3,250,000 1,105,000 Total non-current 3,050,000 1,037,000 260,000 3,310,000 1,125,400 Total 3,590,000 1,220,600 390,000 3,980,000 1,353,200 a. Compute MM?s current income tax expense or benefit for 2011. b. Compute MM?s deferred income tax expense or benefit for 2011. c. Prepare a reconciliation of MM?s total income tax provision with its hypothetical income tax expense in both dollars and rates.
Question 3
Robert and Susan (both 39) are married and have 2 children. Their son, Dylan, is 8 and their daughter, Harper, is 3. Susan sells pharmaceuticals for the Bendigo Drug Company. Robert is a teacher at the local junior high school. In the summer, Robert earns extra money as a self-employed house painter. Their income from their jobs is as follows: Salary Federal Tax State Tax Withheld Withheld Susan $80,000 $5,000 $5,400 Robert 45,000 6,100 3,150 Bendigo has a cafeteria benefits plan that lets employees select benefits equal to as much as 10% of their annual salary or receive the cash equivalent. Susan selects dental insurance, $160,000 in group term life insurance, disability insurance, and company-provided day care. The total cost to Bendigo of these benefits is $6,600. Susan takes the remaining benefits to which she is entitled in cash. Because Bendigo does not have an employee pension plan, Robert and Susan each contribute $5,000 to their individual retirement accounts. The school district gives Robert medical insurance and group term life insurance equal to 100% of his annual salary. He pays an additional $125 a month to cover Susan and the children under his medical plan. The school district also has a qualified contributory pension plan to which it contributes 5% of Robert? s annual salary; he is required to contribute 3%. Robert is allowed to make additional contributions of up to 2% of his salary, and he contributes the maximum. In addition to the life insurance coverage provided by their employers, Robert and Susan purchase $100,000 in whole life insurance on each other, along with a disability insurance policy for Robert. The checkbook analysis that follows shows the costs of these policies. Susan? s job requires her to travel throughout her six-state region. Bendigo has an accountable reimbursement plan from which Susan receives $8,500 for the following expenses: Transportation $4,100 Lodging 2,700 Meals 1,800 Entertainment 1,000 Incidentals 400 In April, Susan and Robert go the racetrack with Susan? s client Annie and her husband. After wagering $170 without winning, Susan wins $2,600 on the last race. The racetrack withholds $780 for federal income taxes and $260 for state income taxes. Robert hires college students to help him paint houses. This year, he is able to hire 8 students (two 4-person crews). Robert shuttles between sites, supervising the jobs, talking to prospective clients, and painting. He treats the college students as independent contractors. His business generates the following income and expenses: Revenues $112,000 Paint 33,100 Other material 6,100 Insurance 5,500 Payments to student help 48,400 During the year, Robert and Susan receive the following portfolio income: Interest on savings account $1,900 Interest on U.S. Treasury bills 400 Cash dividends on stock 1,750 Interest on city of Buffalo bonds 600 Interest on Puerto Rico government bonds 400 Robert and Susan own 3,000 shares of qualified small business stock that they purchased in 2003 for $37,000. Early in 2012 they sell all the shares for $16,800. Robert and Susan also sell 100 shares of Sobey Corporation stock for a short-term capital gain of $3,500 and 250 shares of the Bristol Corporation for a long-term capital loss of $7,250. They pay investment interest of $550 during the year. Robert and Susan own a 4% interest in a limited partnership. The limited partnership reports the following information to them: Ordinary loss $2,100 Long-term capital gain 600 Charitable contribution 300 Cash distribution 2,400 During the year, the family spends 20 days at its summer home; they rent it to vacationers for 80 days. Information pertaining to the rental is as follows: Rental income $6,500 Interest on mortgage 4,450 Property taxes 1,600 Management fee 380 Repairs 320 Utilities 650 Insurance 420 Depreciation (unallocated) 7,000 One night, while returning home from a parent-teacher conference at school, Robert is involved in an automobile accident and is hospitalized for 7 days. He incurs $14,000 in medical expenses. His employer-provided policy reimburses him $11,800 of the costs. In addition, his disability policy pays him $3,200 for the time he misses from school. The car is totally destroyed. It was purchased in 2010 for $19,500, and Robert finds a similar car selling for $8,000. The insurance company reimburses him $6,700. An analysis of Susan and Robert? s checkbook reveals the following payments in 2012: Automobile insurance $1,200 Homeowners? insurance 420 Life insurance 750 Disability insurance 180 Country club dues 2,400 Health club dues 600 Optometrist 285 Veterinarian 275 Prescription drugs 175 Over-the-counter medicine 320 Chamber of Commerce contribution 150 Contribution to candidate for Congress 500 United Way 260 St. Philip? s Church 750 Randolph University 520 Auto registration on automobiles ($130 of which is a license fee) 390 Tax preparation fee 375 During 2012, Robert and Susan take out a $33,000 home equity loan that they use to pay off $8,000 in credit card debt. The remaining loan proceeds go to renovating the house. Interest paid on this loan totals $1,950 during 2012. Robert and Susan purchased their current home by paying $16,000 down and signing a $160,000 mortgage note, secured by the home. The home is worth $225,000, and the balance on the original mortgage is $134,000. They pay interest on their home mortgage of $14,700 during 2012. They also pay $310 in interest on their personal credit cards and $1,720 in property taxes on their home during 2012. Compute Robert and Susan? s taxable income for 2012, the tax on this income, and the amount of any refund or additional tax due. You should provide a summary schedule of these calculations (in proper form) with a supplemental discussion of the treatment of each item given in the facts. If an item does not affect their taxable income calculation, you should discuss why it doesn?t enter into the computation. If you are using tax forms to solve this problem, you will need the following forms and schedules: Form 1040, Schedule A, Schedule B, Schedule C, Schedule D, Schedule E, Form 2106, Form 4684, and Form 8606. In addition, you should obtain a copy of the Form 1040 instructions to help you prepare the tax return.
Question 4
Instructions 1. Estimate the allowance for doubtful accounts, based on the aging-of-receivables schedule. 2. Assume that the allowance for doubtful accounts for Natural Hair Company has a negative balance of 2$3,500 before adjustment on December 31, 2012. Illustrate the effect on the accounts and financial statements of the adjustment for uncollectible accounts. 3. Natural Hair Company reported credit sales of $5,000,000 during 2012. Assume that instead of using the analysis of receivables method of estimating uncollectible accounts, Natural Hair Company uses the percent of sales method and estimates that 1.25% of sales will be uncollectible. Illustrate the effect on the accounts and financial statements of the adjustment for uncollectible accounts using the percent of sales method. 4. Assume that on March 4, 2013, Natural Hair wrote off the $4,350 account of Top Dog Images as uncollectible. Illustrate the effect on the accounts and financial statements of the write-off of the Top Dog Images account. 5. Assume that on August 17, 2013, Top Dog Images paid $4,350 on its account. Illustrate the effect on the accounts and financial statements of reinstating and collecting the Top Dog Images account. 6. Assume that instead of using the allowance method, Natural Hair uses the direct write-off method. Illustrate the effect on the accounts and financial statements of the following: a. The write-off of the Top Dog Images account on March 4, 2013. b. The reinstatement and collection of the Top Dog Images account on August 17, 2013.
Question 5
Write a case analysis on Zappos.com: Behavioral Dynamics?Cause for Concern or for Celebration? Cohesion Case PART III Zappos.com: Behavioral Dynamics?Cause for Concern or for Celebration? (C) Zappos gives its employees plenty of freedom to do their jobs. For example, employees in the Zappos call center are told to do whatever they think is necessary to solve a customer?s problems?and they don?t have to get a manager?s approval to do it. With this level of freedom, one employee observes, ?You have as much power to help a customer as Tony [Hsieh, Zappos CEO] does himself.? This empowerment to do extraordinary things is due to the company?s culture rather than specific policies or procedures. Customer service representatives (CSRs) can take as much time with customers as they need in order to ?wow? them, whether its resolving a shipping problem, helping a customer find a product on a competitor?s Web site if Zappos doesn?t have it in stock, sending flowers to a bereaved customer, or anything else. ?Although this laissez faire philosophy can cause chaos at times, the results are impressive: three-quarters of Zappos?s sales come from repeat customers and its revenues are still growing this year [2009], albeit more slowly than before.? To dissuade any doubters, Hsieh tells two stories, each about a distressed customer. According to one story, ?when the payment deadline for shoes a customer ordered came and went, a Zappos rep e-mailed the woman to remind her the money was due. The woman told the rep the reason: She had meant to send back the shoes, which were for her ailing mother, but in the meantime, her mother had died. The company rep arranged to have UPS [United Parcel Service] pick up the shoes, then actually sent the woman a flower arrangement and condolence card.? In the second story, also mentioned in Zappos.com (A), a woman?s husband ?died in a car accident after she had ordered boots for him from Zappos. The day after she called to ask for help with the return, she received a flower delivery. The call center rep had ordered the flowers without checking with a supervisor and billed them to the company. At the funeral, the widow told her friends and family about the experience. ... Not only was she a customer for life, but so were those 30 or 40 people at the funeral. ... [Hsieh says,] stories like these are being created every single day, thousands and thousands of times. ... It?s just an example that if you get the culture right, then most of the other stuff follows.? As the CEO of Zappos, Hsieh is as unique as the organizational culture that he has fostered. Hsieh is not the typical CEO when it comes to doing most anything, whether it?s developing and maintaining a quite unique company culture, encouraging unusual recruitment and hiring practices, communicating with people, or a host of other activities. Hsieh, a computer whiz and adept at writing programming code, decided to attempt a similarly algorithmic approach to creating the Zappos culture with his list of ten core values?the Zappos version of the ?Ten Commandments.? Included on the Zappos lists are values such as ?be humble,? ?build open and honest relationships with communication,? and ?create fun and a little weirdness.? These core values drive all the key decisions?from hiring to customer relations to the recent downsizing of the company. Max Chafkin, a reporter for Inc. magazine, notes that ?Hsieh is hard to know and even harder to read. He?s generous and smart, but so subdued in one-on-one conversation that it?s easy to mistake his reticence for rudeness. When he does speak, it?s in full paragraphs that sound as if they have been formulated in advance. He sometimes smiles?as he does when he?s explaining the clever way Zappos manages its call center?but he doesn?t laugh at other people?s jokes and seldom tells his own.? ?And yet, this mild-mannered fellow leads a company that is entirely uninhibited. Interviews are held over vodka shots, bathrooms are plastered with ?urine color? charts (ostensibly to ensure that employees are hydrated but also just to be weird and funny), and managers are encouraged to goof off with the people they manage.??What most of Hsieh?s admirers?and even some Zappos employees?don?t know is that this openness doesn?t come naturally. Hsieh has been exceptionally shy all his life and finds meeting strangers exhausting. (His trick to get over his shyness is to pretend he?s interviewing you for a job.)? Still he has become an accomplished public speaker, giving many talks without notes. Tony Hsieh ?is held with a regard typically afforded rock stars and cult leaders.? Frequent and transparent communication with employees and customers?and anyone else who cares to know?is a hallmark of the Zappos experience. ?Hsieh has embraced an ethos of transparency, using social networking tools such as Facebook, Twitter and blogging to share information, both good and bad, with employees, customers and anyone else interested in Zappos.? For example, in just one week, Hsieh ?had given away shoes on Twitter, sent out an open invitation to a company barbecue and solved a service problem a customer left in a blog comment,? among numerous other customer and employee interactions. Approximately one-third of the company?s 1,400 employees ?actively use Twitter to promote the company. ... The goal is to respond to customer comments and form personal connections with their Twitter followers, as well as with friends on Facebook, where employees post blogs and videos. . . . [Doing this gives] customers and other curious social network members a way to get a glimpse at the inside workings of the company.? For employees who are not Twitter users, Zappos offers classes to help them become familiar with the communications application. The frequent and transparent communication applies to bad news as well as good news. Like many companies, Zappos has been hit by the recession that started in December 2007. In late October of 2008, Sequoia Capital, the majority owner of privately held Zappos, insisted that all of the companies in its investment portfolio, including Zappos, cut costs. The Zappos management team decided to lay off 124 employees, approximately 8 percent of its workforce. But even in distressing economic times Zappos has shown that it can be great, this time with immediate communication of the bad news. CEO Tony Hsieh wanted to inform employees quickly so as to help alleviate the inevitable stress the layoffs would cause. ?He announced the move in an e-mail, on his blog, and with Twitter.? ?The quick disclosure is part of a broader culture of electronic openness at Zappos.com. . . . Our true belief here is that everything is transparent,? says Rebecca Ratner, the company?s HR director. Zappos managers are required to spend 10-20 percent of their time ?goofing off? with the associates they manage. Hsieh says that 10-20 percent is ?just kind of a random number we made up. ... But part of the way you build company culture is hanging out outside of the office.? After managers have spent time ?goofing off? with their team members, they invariably tell Hsieh that ?goofing off? has improved communication, generated greater trust, and fostered budding friendships within the team. Hsieh always asks the managers whether the activities helped make the team more efficient, and they report an efficiency increase in the range of 20-100 percent. Interviews of prospective employees are not ordinary either. They are sometimes conducted in a speed-dating format, in which applicants talk with five or six managers in fast-paced five-minute dialogues. However, if the applicant survives this initial round of conversations, then more traditional interviews are conducted to assess the candidate?s technical abilities in the specific area in which they desire to work. Finally, the applicants are interviewed by human resources professionals to ascertain whether they will fit into the Zappos culture. For better or worse, alcohol is frequently a part of the company?s hiring process. Rebecca Ratner, the current head of HR, describes her interview with CEO Hsieh: ?I had three vodka shots with Tony during my interview. . . . And I?m not atypical.? She asked Hsieh whether this type of recruiting behavior didn?t expose Zappos to unnecessary risks. Hsieh?s reply: ?It?s a risk. ... But if we?re building a culture where everyone is friends with everyone else, it?s worth the risk.? Calculated risks, unusually transparent communications, unique ways of promoting teamwork and group cohesion, extraordinary degrees of employee freedom and empowerment, and an unorthodox leader: Are these causes for concern or for celebration? Nelson, Debra L.(Debra L. Nelson Ph.D); James Campbell Quick (2010-09-01). Organizational Behavior: Science, The Real World, and You, 7th Edition (Kindle Locations 13373-13383). Cengage Learning. Kindle Edition.
