Chapter 17 - Solution Manual

Iii this alternative depends upon whether or not the

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the time necessary to actually complete the job. iii. This alternative depends upon whether or not the partner is also pressuring Cooley to have staff members work “off-the-clock." Assuming the situation is all Cooley's idea, Barbara will be bringing a violation of company policy to the partner's attention. Cooley faces discipline. The firm and the client will be more knowledgeable concerning the actual hours necessary to complete the job. iv. This is a possible solution that may not directly affect Barbara Montgomery. An internal investigator will probably cause Cooley to be disciplined. However, the other partners will be affected in a manner similar to C. The most appropriate action is D if it is available. This alternative does not cause Barbara to directly confront a superior in the firm and ensure that the violation will be exposed at the highest levels of the firm. Case 17-3 Item 1 a. Unless cumulative preferred dividends are involved, no recommendations by the CPA are required. Common stock dividend policy is understood by readers of financial statements to be discretionary on the part of the board of directors. The company need not commit itself to a prospective common stock dividend policy or explain its historical policy in the financial statements, particularly since dividend policy is to be discussed in the president's letter. If cumulative preferred dividends are omitted, this should he disclosed in the financial statements or a footnote. b. No comment or opinion qualification is required in the auditor's report on the financial statements unless an omission of cumulative preferred dividends is not properly disclosed. Item 2 a. The staff auditor reviewing the loan agreement misinterpreted its requirement. Retained earnings are restricted in the amount of $298,000, which was the balance of retained earnings at the date of the agreement. The nature and amount of the restriction should be disclosed in the balance sheet or in a footnote to the financial statements. b. Assuming Lancaster does not make the recommended disclosure, the nature of an amount of the restriction should be disclosed in the auditor's report, and the opinion should be appropriately qualified.
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362 Item 3 a. The lease agreement with the Sixth National Bank meets the criteria for an installment purchase of property: (1) it is noncancellable; (2) the company may purchase the property at the expiration date at a nominal price, substantially less than probable fair value: (3) the property meets special needs of the lessee; (4) the lessee is obligated to pay property taxes, insurance and maintenance. Accordingly, Mr. Olds should recommend that the property and the related obligation be stated in the balance sheet at the appropriate discounted amount of future payments under the lease agreement. The income statement should include annual financing charges applicable to the unpaid obligation and amortization of the cost of the property based upon its useful life. Additional footnote disclosure may be desirable.
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