Norman Corporation (A)
Group : 2
Members : Carbonell, Rosario
Zarate, Vic Paulo
Date : October 21, 2013
I. Title of the case: Norman Corporation (A)
II. Background of the Case
Until 2010, Norman Corporation, a young manufacturer of specialty consumer products, had not had its financial statements audited. It had, however, relied on the auditing firm of Kline & Burrows to prepare its income tax returns. Because it was considering borrowing on a long-term note and the lender surely would require audited statements. Norman decided to have its 2010 financial statements attested by Kline & ...view middle of the document...
There was no guarantee for this, of course. On the other hand, if the suit went to trial, Norman might win it. Norman did not carry product liability insurance. Norman reported $50,000 as a reserve for contingencies, with a corresponding debit to retained earnings.
3. In 2010 plant maintenance expenditures were $44,000. Normally, plant maintenance expense was about $60,000 a year, and $60,000 had indeed been budgeted for 2010. Management decided, however, to economize in 2010, even though it was recognized that the amount would probably have to be made up in future years. In view of this, the estimated income statement included an item of $60,000 for plant maintenance expense, with an offsetting credit of $16,000 to a reserve account included as noncurrent liability.
4. In early January 2010 the company issued a 5 percent $100,000 bond to one of its stockholders in return for $80,000 cash. The discount of $20,000 arose because the 5 percent interest rate was below the going interest rate at the time; the stockholder thought that this arrangement provided a personal income tax advantage as compared with an $80,000 bond at the market rate of interest. The company included the $20,000 discount as one of the components of the asset “other deferred charges” on the balance sheet and included the $100,000 as a non current liability. When questioned about this treatment, the financial vice president said, “I know that other companies may record such a transaction differently, but after all we do owe $100,000. And anyway, what does it matter where the discount appears?”
5. The $20,000 bond discount was reduced by $784 in 2010, and Ms. Warshaw calculated that this was the correct amount of amortization. However, the $784 was included as an item of non-operating expense on the income statement, rather than being charged directly to retained earnings.
6. In connection with the issuance of the $100,000 bond, the company had incurred legal fees amounting to $500. These cost were included in non-operating expense in the income statement because, according to the financial vice president, “issuing bonds is an unusual financial transaction for us, not a routine operating transaction.”
7. On January 2, 2010, the company had leased a new Lincoln Town Car, valued at $35,000, to be used for various official company purposes. After three years of $13,581 annual year-end lease payments, title to the car would pass to Norman, which expected to use the car through at least year-end 2014. The $13,581 lease payment for 2010 was included in operating expenses in the income statement. Although Mr. Burrows recognized that some of these transactions might affect the provision for income taxes, he decided not to consider the possible tax implications until after he had thought through the appropriate financial accounting treatment.
Norman Corporation |
Proposed income statement (condensed) |
For the Year 2010 |
Net Sales | | $1,658,130...