Majority Voting Interest 12001500 Words
You are an accounting student
taking a class in accounting. Your professor has given you an assignment
for the weekend. He wants you to look at each ethical scenario listed
below and answer the questions related to that scenario.
- Mr.
Right and Mr. Wrong own an antique store in a partnership. They share
profits and losses equally and receive an annual salary of $50,000, as
per the partnership agreement. Mr. Right travels the country buying
antiques. Mr. Wrong manages the store. From time to time, they use some
of the small items from the store merchandise for personal use. Mr.
Wrong’s daughter is getting married, and she loves an antique piece that
costs $5,000. Mr. Wrong makes the following entry on the books to
record the transaction:
Debit Credit Cost of goods sold $5,000 Inventory $5,000
- How should Mr. Wrong have recorded the transaction?
- What are the ethical aspects of Mr. Wrong’s action?
- Mr.
White (invested $20,000) and Mr. Black (invested $10,000) are in a
partnership to run a marketing firm. They share profits and losses in
the ratio of 2:1, which is also the ratio of their initial investment in
the business. Mr. White manages the office but Mr. Black gets all of
the contracts for the firm. It is his high profile that gets the
contracts for the firm. At the end of the year, the firm has reported
net income of $300,000, which was allocated in the ratio of 2:1,
($200,000 for Mr. White, and $100,000 for Mr. Black). On Dec 31, 20XX,
Mr. White’s capital balance was $150,000 and Mr. Black’s capital balance
was $100,000. Mr. White has withdrawn more cash from the business than
his partner Mr. Black.
- On Jan 15th, Mr. White
discovered that the net income for the previous year was understated by
$60,000. Mr. Black tells Mr. White that this net income of $60,000
should be shared in the proportion of their current capital balances.
(Mr. White = 150,000/$250,000 = 60% = $36,000; Mr. Black =
$100,000/$250,000 = 40% = $24,000). But Mr. White feels that the
additional income should be shared in the ratio of 2:1 ($60,000 x 2/3 =
$40,000 Mr. White; $60,000 x 1/3 = $20,000 Mr. Black). Who is correct?
Why?
- GAAP rules are clear about when a company needs to
consolidate or not, but companies tend to find loopholes to circumvent
this rule. GAAP clearly indicates that consolidated financial statements
are “usually necessary for a fair presentation when one of the
companies in the group directly or indirectly has a controlling
financial interest in other companies: the usual condition for a
controlling financial interest is ownership of a majority voting
interest.”
Controlling financial interest means to own more/greater than 50% of the voting stock of another company.
Because
of this “greater than 50% of the voting stock,” some of the companies
have taken advantage of the criterion, causing serious problems in the
business world. Companies were destroyed and with it, employees lost
their jobs, their pensions, and 401Ks. So FASB had to make changes to
GAAP for consolidations and issued new guidelines.
- As a student of accounting, you must know these rules. Please
research and discuss the new guidelines issued by GAAP for consolidating
entities.- Give an example of a company that was involved in this kind of unethical behavior.