Week 4 Learning Team Assignments
Side Kicks Company
December 31, 2007
Less: Allowance for uncertain
Inventory—at LIFO cost
Total existing assets
Investments in stocks and bonds,
of which investments of $120,000
have been pledged as security for
notes due—at fair value
Property, plant, and equipment
Expenditure of unfinished plant facilities
Building in process of
Less: Accum. depreciation
Patents—at cost less amortization
PROBLEM 5-3 (Continued)
Liabilities and Stockholders’ Equity
Notes payable, secured by
investments of $120,000
Total existing debts
8% bonds payable, due
January 1, 2018
Less: Unamortized discount on
Authorized 600,000 shares of $1
par value; issued and
outstanding, 500,000 shares
Premium on common stock
Total debts and
The staff auditor assessing the loan agreement misunderstood its requirements. Saved incomes are limited in the sum of $420,000 that was the balance of saved incomes on the date of the agreement. The nature and sum of the limitation must be revealed in the balance sheet or a note to the fiscal reports.
Unless cumulative preferred dividends are concerned, no recommendation by the CPA is necessary. Common stock dividend policy is understood by readers of fiscal reports to be optional on the part of the board of directors. The corporation need not obligate itself to a future common stock dividend policy or clarify its past policy in the fiscal reports, mainly because dividend policy is to be discussed in the president’s letter. In case cumulative preferred dividends are omitted, this must be revealed in the fiscal reports or a note.
Note that the SEC encourages corporations to reveal their dividend policy in their yearly report. Those that: (1) have earnings however fail to pay dividends or (2) don’t expect to pay dividends in the near future are encouraged to report this information. Additionally, organizations which demonstrate a regular pattern of paying dividends are encouraged to show whether they plan to carry on this practice in the future.
A competitive development of this nature usually is considered to be the kind of following event which offers proof with respect to a condition that didn’t exist at the date of the balance sheet. In some situations the auditor may decide that Rem’s poor competitive position was obvious at year-end. In any event, the development must be revealed to users of the fiscal reports since the financial recoverability of the new plant as well as inventory...
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