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Advanced Accounting GAAP Case Study

Case Study Question: As a reviewer of the BC Securities Commission, you are in the process of reviewing the financial statements of public companies.

The following items have come to your attention:

1. A mining company sells a foreign subsidiary that does uranium mining, although the company continues to mine uranium in other countries.
2. A retail outlet changed its calculation for bad debt expense from 1% to 0.5% of sales because of changes in its clientele.
3. An automobile dealer sells for $137,000 an extremely rare 1930 S type Invicta, which is purchased for $21,000 10 years ago. The Invicta is the only such display item that the dealer owns.
4. A steel company changes from straight line amortization to accelerated amortization in accounting for its plant assets.
5. A construction company, at great expense to itself, prepares a major proposal for government loan. The loan is not approved
6. A water pump manufacturer has had large losses resulting from a strike by its employees early in the year.
7. Amortization for a prior period was incorrectly understated by $950,000. The error was discovered in the current year
8. A large sheep rancher suffered a major loss because the provincial government required that all sheep in the province be killed to halt the spread of a rare disease. Such a situation has not occurred in the province for 20 years.
9. A food distributor that sells wholesale to supermarket chains and to fast food restaurants (two major classes of customers) decides to discontinue the division that sells to one of the two classes of customers.

Instructions: State and Discuss the issue in each situation!

Solution Preview

Attached is a word document that will give you a statement for each issue and a discussion for each of the nine items listed. This is only an attempt to give the student some ideas to work with. By no means should this be their final work. Further explanation should be given to each of these issues as well as more details written by the student. It is also important to note that GAAP differs from IGAAP on some of these issues, with regard to practices in the U.S.

Case Study Question: As a reviewer of the BC Securities Commission, you are in the process of reviewing the financial statements of public companies.

The following items have come to your attention:

1. A mining company sells a foreign subsidiary that does uranium mining, although the company continues to mine uranium in other countries.

Issue: Financial information of a subsidiary on consolidated financial statements.
Discussion: The sale of a foreign subsidiary will change the reporting of the consolidated financial statements. In such a case the, company should disclose in the financial statements in the year in which it changes a reporting entity the nature of the change and the reason for it. It should also report, for all periods presented, the effect of the change on income before extraordinary items, net income, and earnings per share. These disclosures need not be reported in subsequent periods' financial statements.

2. A retail outlet changed its calculation for bad debt expense from 1% to 0.5% of sales because of changes in its clientele.

Issue: Change in accounting estimate of bad debt expense.
Discussion: Companies base their accounting estimates of bad debt on past experience. A change in clientele may ...

Solution Summary

This solution abstract deals with nine advanced accounting issues. These issues include the following: information of a subsidiary on a consolidated financial statements; change in accounting estimate of bad debt expense; change in inventory valuation due to unusual circumstances; change in accounting method of amortization affected by a change in principle; extraordinary loss due to incurred expenses; extraordinary income losses due employees strike; error in understated amortization for prior period; extraordinary loss of assets and income and discontinue distribution of a division. For each situation in the case study, this solution identifies the issue is and then discusses that issue.

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