INTERMEDIATE ACCOUNTING - Cases

Case 1: Mead Motors purchases an automobile for its new car inventory from Generous
Motors, which finances this transaction through its financial subsidiary, Generous Motors
Credit Company (GMCC). Mead pays no funds to Generous Motors or GMCC until it
sells the automobile. Mead must then repay the balance of the loan plus interest to
GMCC. How should Mead report the acquisition and repayment transactions in its
Statement of Cash Flows?
Case 2: Narda Corporation agreed to sell all of its capital stock to Effie Corporation for
three monthly payments of $200,000. After Effie made the first required payment, it
ceased making other payments. The stock subscription agreement states that Effie, thus,
forfeits its payments and is entitled to no other future consideration. How should Narda
record the $200,000 forfeited payment?
Case 3: Lowland Appliance Stores offers customers purchasing its appliances separately
priced (extended) warranties. Lowland services these extended warranties. Its customers
can receive no refunds for not using these warranties, and, of course, Lowland must
honor these contracts-regardless of any future costs in doing so. It also tracks the
profits and losses these types of warranties generate by appliance category-in order to
help maintain a competitive price and costing structures. How should Lowland recognize
the revenues and expenses of such extended warranties?
Case 4: As of January 1, the Lohse Company owes the First Arbor Bank $350,000 which
is due on December 31. Since Lohse seems unable to repay the note, the bank agreed that
Lohse can settle this balance by agreeing to make four, annual installments on each of
the next four years, provided that it adds a due on demand clause to the note.
Specifically, the lender will do its best not to call the note provided that no adverse
significant shift in operations occurs." However, First Arbor Bank has the sole discretion
to ascertain if these adverse conditions arose, and then to call the note due immediately.
How should Lohse account for this above situation?
Case 5: On January 1, the Chin Company agreed to purchase all of Jack Jackson's interest
in the company for $30 per share. Jack, who owns 15%-and a controlling interest of
Chin-previously threatened to engage in a hostile takeover attempt of Chin. For the last
two years, Chin's stock traded from about $12-23-reaching $23 on December 31 of last
year. How should Chin record this transaction?

Case 6: James Olds buys a four-year, $1,000,000 certificate of deposit from the Second
National Bank. James will receive 5% interest in year 1; 5.5% in year 2; 6% in year
three; and 6.5% interest in year 4. If James redeems this certificate before the maturity

date, he would receive a cumulative 4.5% annual rate of interest of 4.5%. The Bank has
ascertained that less than one percent of its depositors redeem their certificates before the
maturity date. The bank asks its accountant how to accrue and measure such interest
payment obligations.
Case 7: On January 1, year 1, Melvin Corporation promises to unconditionally transfer
a building that cost $100,000 (appraised recently at $300,000) to the Vivian Company on
January 1, year 2 for a boat she bought for $250,000. As of December 31, year 2, Melvin
still has not transferred title to the building, although it received title to the boat. How
should Vivian and Melvin record these transactions?
Case 8: Herb Construction Company is building a hotel for speculative purposes. That is,
the Company has not yet found a buyer for the hotel, but expects to do so within a few
months. Herb, who expects to spend about another two years to complete construction of
the hotel, asks his accountant if interest and property taxes associated with this
construction site should be capitalized or expensed. At what rate of interest should Herb
use, if any, to capitalize any interest costs?
Case 9: In order to help induce Jill Gregory to remain as president of the Reed Company,
in 2000 it promises to pay her (or her estate) $200,000 per year for the next 15 years-even
if she leaves the company or dies. Reed wants to properly record this transaction as
deferred compensation, but is unsure of how many years it should use to amortize this
cost. Moreover, Reed also purchased a whole life life insurance policy for Jill, naming
the company as the sole beneficiary. Reed wants to ascertain if it can offset the cash
surrender value of the policy against the above deferred compensation liability.
Case 10: The Bootsie Holding Company has sales exceeding $10 billion and each of its
three, wholly-owned subsidiaries has sales exceeding $2 billion. Three years ago, the
subsidiaries had complex capital structures-until Bootsie acquired them. Bootsie's
annual report shows its consolidated income and individual income statement accounts of
each subsidiary company. Should Bootsie also report separate earnings-per-share
balances for the three subsidiary companies?
Case 11: Leila Company began an operating lease arrangement with Debco Industries,
which was slated to begin on January 1, at monthly lease payments of $10,000.
However, Debco's negligence prevented Leila from moving in on time-since it failed to
clean up the place adequately enough to earn a Certificate of Occupancy from the
township. Thus, on January 1, Leila spent $5,000 for leasehold improvements, which
enabled her to obtain the needed Certificate of Occupancy on April 1. In any event, Leila
paid Debco all the required $30,000 lease payments and has decided not to pursue legal
action for the un-ready building. However, can Leila defer the $30,000 January-March
lease payments over the remaining 33 months of the lease contract?