According to the phase 2 individual project assignment instructions, each student is asked to look at two scenarios and answer the related ethical questions following each one (CTU Online, 2013). Additionally, it is asked that each student provide a discussion on the new GAAP guidelines for consolidating entities, and to provide an example of a firm that has experienced trouble for failure to comply with the GAAP guidelines.
Ethical Dilemmas in Partnerships
In the first scenario, there are two partners in an antique business, Mr. Right and Mr. Wrong. Mr. Right manages ...view middle of the document...
Wrong’s capital account for $5,000. Recording the taking of the item in this manner makes Mr. Wrong and only Mr. Wrong responsible for the payment of the cost of the item. Regardless of the account debited, one would still credit the inventory account on the journal.
In the second scenario, there are two investors in a partnership, Mr. White and Mr. Black. Mr. White manages the office, and Mr. Black obtains all the contracts for the firm. Mr. White invested $20,000 while Mr. Black invested $10,000; all profits and losses are divided on a 2:1 ratio between them. According to the text, at the end of the year the firm reports a net income of $300,000. Using a 2:1 ratio, the division is $200,000 for Mr. White and $100,000 for Mr. Black. However, in January the following year it was discovered that there was another $60,000 in net income that was not reported the previous year. Mr. Black thinks the income should be split according to their current capital balances; but Mr. White believes it should be split based on their agreed 2:1 ratio.
Splitting the income based on their current capital balances deters them from following the partnership agreement drawn up at the start of the partnership. This is an unethical act and can cause harsh feelings in the long-run. Amendments can be made to an agreement provided all partners are in agreement on the terms; however, changes are not allowed on the spur of the moment.
In Mr. Black’s suggestion he would receive $24,000 and Mr. White would receive $36,000. However, that would not be fair as the agreement was to split the net income and losses on a 2:1 ratio. Mr. White is correct in suggesting they keep to their 2:1 ratio agreement as this keeps in line of the written partnership agreement between him and Mr. Black. Therefore, the split would be $40,000 for Mr. White (2/3 of $60,000 = $40,000) and $20,000 for Mr. Black (1/3 of $60,000 = $20,000). Any other type of split would be breaking the written partnership agreement set up at the beginning of the business partnership.
GAAP and Consolidation
In late 2011, early 2012 GAAP updated its regulations for consolidating. GAAP uses to models for consolidation which are variable interest entities (VIE) and voting interest entities. A concept does not exist for a firm with less than a majority of voting rights. According to Ernst and Young (2011), another aspect of consolidation is the principle-agent evaluation in control assessment. This states that in VIEs, consolidation is based on economic considerations, while with voting interest entities there is no explicit concept. Another aspect is consideration of kick-out rights and participating rights in control assessment. In this concept “VIEs are substantive if unilaterally exercisable by a single party” (Ernst & Young, 2011). Voting interest entities are exercisable by a majority of parties. Consideration of related parties in control assessment states that VIEs have an aggregated interest...