ACC 306 Week 4 Ethics Case 19-7 – International Network Solutions provides products and services related to remote access networking

Ethics Case 19–7 International Network Solutions ● LO6

International Network Solutions provides products and services related to remote access networking. The company has grown rapidly during its first 10 years of operations. As its segment of the industry has begun to mature, though, the fast growth of previous years has begun to slow. In fact, this year revenues and profits are roughly the same as last year.

One morning, nine weeks before the close of the fiscal year, Rob Mashburn, CFO, and Jessica Lane, controller, were sharing coffee and ideas in Lane’s office.

Lane: About the Board meeting Thursday. You may be right. This may be the time to suggest a share buyback program.

Mashburn: To begin this year, you mean?

Lane: Right! I know Barber will be lobbying to use the funds for our European expansion. She’s probably right about the best use of our funds, but we can always issue more notes next year. Right now, we need a quick fix for our EPS numbers.

Mashburn: Our shareholders are accustomed to increases every year.

Required:

1. How will a buyback of shares provide a “quick fix” for EPS?

2. Is the proposal ethical? 3. Who would be affected if the proposal is implemented?

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ACC 306 Week 4 E 19-24 EPS; concepts; terminology – Listed below are several terms and phrases associated with earnings per share

E 19–24 EPS; concepts; terminology ● LO5 through LO13

Listed below are several terms and phrases associated with earnings per share. Pair each item from List A with the item from List B (by letter) that is most appropriately associated with it.

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ACC 306 Week 4 E 19-9 Washington Distribution – In order to encourage employee ownership of the company’s $1 par common shares

E 19–9 – Washington Distribution – Employee share purchase plan ● LO3

In order to encourage employee ownership of the company’s $1 par common shares, Washington Distribution permits any of its employees to buy shares directly from the company through payroll deduction. There are no brokerage fees and shares can be purchased at a 15% discount. During March, employees purchased 50,000 shares at a time when the market price of the shares on the New York Stock Exchange was $12 per share.

Required:

Prepare the appropriate journal entry to record the March purchases of shares under the employee share purchase plan

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ACC 306 Week 4 E 19-5 American Optical Corporation provides a variety of share-based compensation plans to its employees

E 19–5 – American Optical Corporation – Stock options ● LO2

American Optical Corporation provides a variety of share-based compensation plans to its employees. Under its executive stock option plan, the company granted options on January 1, 2011, that permit executives to acquire 4 million of the company’s $1 par common shares within the next five years, but not before December 31, 2012 (the vesting date). The exercise price is the market price of the shares on the date of grant, $14 per share. The fair value of the 4 million options, estimated by an appropriate option pricing model, is $3 per option. No forfeitures are anticipated. Ignore taxes.

Required:

1. Determine the total compensation cost pertaining to the options.

2. Prepare the appropriate journal entry to record the award of options on January 1, 2011.

3. Prepare the appropriate journal entry to record compensation expense on December 31, 2011.

4. Prepare the appropriate journal entry to record compensation expense on December 31, 2012.

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ACC 306 Week 4 E 19-2 VKI Corporation – Restricted stock award plan – On January 1, 2011, VKI Corporation awarded 12 million of its $1 par common shares to key personnel

E 19–2 – VKI Corporation – Restricted stock award plan ● LO1

On January 1, 2011, VKI Corporation awarded 12 million of its $1 par common shares to key personnel, subject to forfeiture if employment is terminated within three years. On the grant date, the shares have a market price of $2.50 per share.

Required:

1. Determine the total compensation cost pertaining to the restricted shares.

2. Prepare the appropriate journal entry to record the award of restricted shares on January 1, 2011.

3. Prepare the appropriate journal entry to record compensation expense on December 31, 2011.

4. Prepare the appropriate journal entry to record compensation expense on December 31, 2012.

5. Prepare the appropriate journal entry to record compensation expense on December 31, 2013.

6. Prepare the appropriate journal entry to record the lifting of restrictions on the shares at December 31, 2013.

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ACC 306 Week 4 E 18-24 Softech Canvas Goods – Comparative balance sheets for Softech Canvas Goods for 2011 and 2010 are shown below

E 18–24 – Softech Canvas Goods – Profitability ratio ● LO1

Comparative balance sheets for Softech Canvas Goods for 2011 and 2010 are shown below. Softech pays no dividends, and instead reinvests all earnings for future growth.

Required:

1. Determine the return on shareholders’ equity for 2011.

2. What does the ratio measure?

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ACC 306 Week 4 E 18-18 Brenner-Jude Corporation – Shown below in T-account format are the changes affecting the retained earnings of Brenner-Jude Corporation during 2011

E 18–18 – Brenner-Jude Corporation -Transactions affecting retained earnings ● LO6 LO7

Shown below in T-account format are the changes affecting the retained earnings of Brenner-Jude Corporation during 2011. At January 1, 2011, the corporation had outstanding 105 million common shares, $1 par per share.

Required:

1. From the information provided by the account changes you should be able to recreate the transactions that affected Brenner-Jude’s retained earnings during 2011. Prepare the journal entries that Brenner-Jude must have recorded during the year for these transactions.

2. Prepare a statement of retained earnings for Brenner-Jude for the year ended 2011.

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ACC 306 Week 4 Communication Case 18-10 The current conceptual distinction between liabilities and equity defines liabilities independently of assets and equity, with equity defined as a residual amount

Communication Case 18–10 Should the present two-category distinction between liabilities and equity be retained? Group interaction. ● LO1

The current conceptual distinction between liabilities and equity defines liabilities independently of assets and equity, with equity defined as a residual amount. The present proliferation of financial instruments that combine features of both debt and equity and the difficulty of drawing a distinction have led many to conclude that the present two-category distinction between liabilities and equity should be eliminated. Two opposing viewpoints are:

View 1: The distinction should be maintained.

View 2: The distinction should be eliminated and financial instruments should instead be reported in accordance with the priority of their claims to enterprise assets.

One type of security that often is mentioned in the debate is convertible bonds. Although stock in many ways, such a security also obligates the issuer to transfer assets at a specified price and redemption date. Thus it also has features of debt. In considering this question, focus on conceptual issues regarding the practicable and theoretically appropriate treatment, unconstrained by GAAP.

Required:

1. Which view do you favor? Develop a list of arguments in support of your view prior to the class session for which the case is assigned.

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ACC 306 Week 3 P 17-16 Lakeside Cable – Actuary and trustee reports indicate the following changes in the PBO and plan assets of Lakeside Cable during 2011

P 17–16 – Lakeside Cable – Comprehensive— reporting a pension plan; pension spreadsheet; determine changes in balances; two years ● LO3 through LO8

Actuary and trustee reports indicate the following changes in the PBO and plan assets of Lakeside Cable during 2011:

Required:

1. Determine Lakeside’s pension expense for 2011 and prepare the appropriate journal entries to record the expense as well as the cash contribution to plan assets and payment of benefits to retirees.

2. Determine the new gains and/or losses in 2011 and prepare the appropriate journal entry(s) to record them.

3. Prepare a pension spreadsheet to assist you in determining end of 2011 balances in the PBO, plan assets, prior service cost—AOCI, the net loss—AOCI, and the pension liability.

4. Assume the following actuary and trustee reports indicating changes in the PBO and plan assets of Lakeside Cable during 2012: Determine Lakeside’s pension expense for 2012 and prepare the appropriate journal entries to record the expense, the cash funding of plan assets, and payment of benefits to retirees.

5. Determine the new gains and/or losses in 2012 and prepare the appropriate journal entry(s) to record them.

6. Using T-accounts, determine the balances at December 31, 2012, in the net loss–AOCI and prior service cost–AOCI.

7. Confirm the balances determined in Requirement 6 by preparing a pension spreadsheet.

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ACC 306 Week 3 P 16-7 – Sherrod, Inc., reported pretax accounting income of $76 million for 2011

P 16–7 – Sherrod, Inc. – Multiple differences; a. calculate taxable income; balance sheet classification ● LO4 LO6 LO8

Sherrod, Inc., reported pretax accounting income of $76 million for 2011. The following information relates to differences between pretax accounting income and taxable income:

a. Income from installment sales of properties included in pretax accounting income in 2011 exceeded that reported for tax purposes by $3 million. The installment receivable account at year-end had a balance of $4 million (representing portions of 2010 and 2011 installment sales), expected to be collected equally in 2012 and 2013.

b. Sherrod was assessed a penalty of $2 million by the Environmental Protection Agency for violation of a federal law in 2011. The fine is to be paid in equal amounts in 2011 and 2012.

c. Sherrod rents its operating facilities but owns one asset acquired in 2010 at a cost of $80 million. Depreciation is reported by the straight-line method assuming a four-year useful life. On the tax return, deductions for depreciation will be more than straight-line depreciation the first two years but less than straight-line depreciation the next two years ($ in millions):

d. Bad debt expense of $3 million is reported using the allowance method in 2011. For tax purposes, the expense is deducted when accounts prove uncollectible (the direct write-off method): $2 million in 2011. At December 31, 2011, the allowance for uncollectible accounts was $2 million (after adjusting entries). The balance was $1 million at the end of 2010.

e. In 2011, Sherrod accrued an expense and related liability for estimated paid future absences of $7 million relating to the company’s new paid vacation program. Future compensation will be deductible on the tax return when actually paid during the next two years ($4 million in 2012; $3 million in 2013).

f. During 2010, accounting income included an estimated loss of $2 million from having accrued a loss contingency. The loss is paid in 2011 at which time it is tax deductible.

Balances in the deferred tax asset and deferred tax liability accounts at January 1, 2011, were $1.2 million and $2.8 million, respectively. The enacted tax rate is 40% each year.

Required:

1. Determine the amounts necessary to record income taxes for 2011 and prepare the appropriate journal entry.

2. What is the 2011 net income?

3. Show how any deferred tax amounts should be classified and reported in the 2011 balance sheet.

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