STUDENT CASES

to accompany

Accounting & Auditing Research: Tools & Strategies, 7e

NOTE: In addition to the in-chapter and end-of-chapter exercises which serve as short cases
you will find the following short cases arranged by course title that can also be utilized as
short cases that require the student to access the authoritative literature to address the issue
presented in the case. Solutions to the cases below are available to instructors on the Weirich
Accounting & Auditing Research 7e instructor website at www.wiley.com/college/weirich.
Other excellent sources of longer and more detailed cases include the Deloitte Trueblood
cases (www.deloitte.com/more/DTF/cases_subj.htm), as well as the AICPA cases
(www.aicpa.org).

Topical Index of Student Cases

INTERMEDIATE ACCOUNTING
Case 1: Reporting acquisition and repayment transactions in the Statement of Cash Flows
Case 2: Recording a forfeited payment
Case 3: Revenue and expense recognition associated extended warranties
Case 4: Accounting for due on demand note payable
Case 5: Purchase of a controlling interest with a greenmail premium
Case 6: Revenue recognition in the construction industry
Case 7: Accrual and measurement of interest payments
Case 8: Recognition of an asset transfer when title has not yet been received
Case 9: Capitalization of interest and property taxes on a construction project
Case 10: Deferred compensation and life insurance policy recognition
Case 11: Reporting earnings per share balances for subsidiary companies
Case 12: Deferment of lease payments
Case 13: Disclosure of prior period adjustments in the statement of cash flows
Case 14: Measurement and recording of payments for sick days
Case 15: Comparative cash flow statements
Case 16: Social security benefits as assets
Case 17: Recording a stock dividend as a stock split
Case 18: Gain on a nonmonetary exchange

ADVANCED ACCOUNTING
Case 1: Reporting of letters of guarantee notes payable
Case 2: Factors affecting minority interest control
Case 3: Profits and losses in the investment in foreign currencies
Case 4: Amortization of foreign currency transaction gains and losses
Case 5: Reflection of expensed computer programs on consolidated financial statements
Case 6: Classification of a proposed financial instrument as a hedge
Case 7: Disclosure of proceeds and payments from cash flow hedging activities
Case 8: Proper valuation of a guaranteed business combination

GOVERNMENT AND NOT-FOR-PROFIT ACCOUNTING

Case 1: Recognition restricted or non-restricted assets that are promised but not received
Case 2: Affect of permanent reductions in the value of promised assets
Case 3: Disclosure and classification on a companys Statement of cash Flows
Case 4: Disclosure of potential interest rate swings and commercial paper by a city
Case 5: Capital and operating leases between related parties
Case 6: Elimination of profits on intercompany sales
Case 7: Reporting of funds and potential obligations on bonds issued for third parties
Case 8: Disclosure of payments made to agents or brokers
Case 9: Accrual of vacation time of unestablished employees

AUDITING
Case 1: Communication with predecessor auditors
Case 2: Scope limitations
Case 3: Outside services for inventory counts
Case 4: Supplementary disclosures
Case 5: Restating prior years financial statements
Case 6: Independence in a review or compilation engagement
Case 7: Qualified report and account classification
Case 8: Re-issuance of financial statements
Case 9: Communication with audit committees
Case 10: Accounting for assets held for sale

TAX
Case 1: When should gross income be accrued?
Case 2: Stock purchased by an employee
Case 3: Income sourcing- international
Case 4: Business deductions
Case 5: Deduction for foreign travel
Case 6: Contingent liabilities

INTERMEDIATE ACCOUNTING
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 contractsregardless of any future costs in doing so. It also tracks the
profits and losses these types of warranties generate by appliance categoryin 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 Jacksons
interest in the company for $30 per share. Jack, who owns 15%and a controlling
interest of Chinpreviously threatened to engage in a hostile takeover attempt of Chin.
For the last two years, Chins stock traded from about $12-23reaching $23 on
December 31 of last year. How should Chin record this transaction?

Case 6: Bo Broker Company charges a fee for bringing together the Acme Construction
Company and the First Bank Company. The parties agree that Bo earns her fee when
Acme and First agree to the terms of the construction mortgage. However, Bo can
receive four types of documents to settle this matter: (a) a non-interest bearing,
unsecured negotiable note in payment of the fees earned, which is payable over the
time period of the related construction mortgage; (b) a non-negotiable note payable over
the same time period as in case (a); (c) a commitment letter, not contingent upon the
future event of the borrower receiving certain construction draws; or (d) a commitment
letter, where the fees would be paid only if the borrower actually receives the draws for
the construction from the lender. Bo asks the accountant when to recognize revenues
under each of these four scenarios.
Case 7: 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 8: 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 9: 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 10: 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
yearseven 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 11: 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 structuresuntil Bootsie acquired them. Bootsies
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 12: 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, Debcos negligence prevented Leila from moving in on timesince 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?
Case 13: After the Julie Company issued its previous years financial statements, it
noticed that it incorrectly calculated depreciation expense and, thus, disclosed this fact as
a prior period adjustment in its current years financial statements. (This difference also
did not affect any cash balances, since Julie maintained an operating loss for both
periods.) However, Julie did not issue comparative financial statements in the current
year. Julie now wonders how to disclose this prior period adjustment in its current years
Statement of Cash Flows.
Case 14: The Heather Companys fiscal year ends on June 30. Its employees (with at
least three months of experience) are entitled to 12 paid sick days annually for each
calendar year beginning on January 1. An employee not taking his/her earned sick days
would receive payment thereon on December 31 of that year. How should Heather
record and measure such a liability as of June 30th?
Case 15: Alex Corporation is planning this year to present comparative income
statements but only the current years balance sheet. James Johnston, president of Alex
Corporation requests your advice as to whether comparative cash flow statements for
both the current and prior periods are necessary considering only the current years
balance sheet is presented. Are there any authoritative pronouncements that address this
issue that you could present to Mr. Johnston?
Case 16: A new client for your firm is Sam Jones who is preparing personal financial
statements for a bank loan. Mr. Jones is attempting to list his social security benefits to
be received based on his future life expectancy as an asset on his financial statements.
Mr. Jones states that such benefits meet the definition of an asset. Would you agree to
allow the social security benefits to be listed as an asset?

Case 17: Albright Inc. has recently issued a 10% stock dividend to its existing
stockholders. As a result of the issuance of the stock dividend the market price of the
stock declined 25%. Albright has requested your assistance as to treating this stock
dividend as a stock split. Would this be acceptable under GAAP?
Case 18: Horizons Inc. has agreed to sell an investment in a subsidiary that has been
accounted for on the equity method of accounting to a minority stockholder in exchange
for the stockholders share in Horizons. Since the fair value of the investment exceeds its
book value, Horizons CEO is considering recognizing a gain on the exchange. However,
the new CFO at Horizons is recommending to the board of directors that the excess from
the exchange be accounted as a credit to equity. Horizons turns to you for advice!

ADVANCED ACCOUNTING Cases

Case 1: Rosie Corporation has 70% of the outstanding voting stock of Smith Corporation
and 10% of the voting stock of Tommy Corporation. Smith also just spent $10,000 to
acquire 20% of Tommys voting stock. Smith has issued irrevocable letters of credit to
guarantee Tommys notes payable. In the current year, Tommy lost $100,000. How
should the parties report the above arrangements in its consolidated financial statements?
Case 2: Joe Brock owns 10,000 of the 60,000 outstanding shares of Big Corporation;
Leslie Ross own 20,000 shares; Mark Jones and his twin brother Sam each own 5,000
shares; and about 300 other shareholders own the remaining 20,000 shareswith no one
other shareholder owning more than 1,000 shares. According to the provisions of SFAS
94, since Leslie owns half of the outstanding shares, he, in general, controls Big
Corporation and, thus, should consolidate his interest with that of the corporation.
However, Joe Brock is unhappy with Marks management decisions and plans to
challenge his authority. What factors arise in considering if a minority investor can
maintain such control or even prevent others from exercising such control?
Case 3: The Treasury Department of Drof Motors invests excess funds daily (e.g., in
foreign currencies). It, thus, earns profits and losses, which are included in the
companys consolidated financial statements. Should Drof consider its Treasury
operations as a (distinct) segment in preparing its external financial statements?
Case 4: The Builtwell Construction Company is building a hospital for a third party. As
such it borrows substantial funds from a foreign bank and repays the required interest
costs as scheduled. Builtwell also incurs some foreign currency truncation gains and
losses on these transactions. Builtwell properly amortizes the interest costs over the life
of the construction project, but would now also like to amortize the associated foreign
currency transaction gains and losses as well. Can Builtwell amortize such costs?
Case 5: Tony Computer Services Corporation trades 50% of its common stock for the
rights to certain computer programs of the Janet Corporation. Janet previously expensed
such costs of developing these computer programs. Tony concurrently sold the other
50% interest in its stock to the Jeannette Company for $1,000,000. Tony later acquired
another the rights to the Udder Computer Companys computer programs in exchange for
stock valued at $1,500,000. Tony, thus, debited Investments in Subsidiaries and credited
Earnings for $1.5 million to reflect this latest transaction. How should Tonys
Case 6: The Rich Company seeks to limit its potential exposure from future variableinterest debt by engaging in a cash flow hedge. Thus, it seeks to acquire a financial
instrument that varies in price in opposition to Ricks expected payments on this debt
instrument. However, it is unsure of the effectiveness of this hedging instrumentsince
it is unsure of the expected timing of such transactions. Can Rich classify this
proposed financial instrument as a cash flow (or other) hedge?

Case 7: Merrill Corporation engages in a valid cash flow hedge where it minimizes the
risk from variable interest rated debt by promising to issue dividend payments from both
its own portfolio and its portfolio of outside marketable securities. Since interest
payments normally are classified on the Statement of Cash Flows as Operating Activities;
payments of dividends from outside investments are classified as Investing Activities;
and dividend payments from its own stock are financing activities, where should Merrill
disclose the cash flows from the above transactions?
Case 8: On January 1, year 1, the Allen Company issues 100,000 shares of its stock
(which is valued at $10 per share) to acquire the Natie Company. The purchase
agreement also states that Allen will pay $200,000 in year two if Natie has net income of
at least $400,000 in year 2. There is a 50% chance Natie will meet or exceed $400,000 of
net income in year 2. How should Allen recognize this transaction?

GOVERNMENT AND NOT-FOR-PROFIT ACCOUNTING Cases

CASE 1:
On January 1, the Hawaii Cancer Institute has received a promise from the Obama
Foundation to receive a building that the Foundation recently appraised at $200,000.
However, the building cost only $125,000. The Cancer Institute promised to keep the
building permanently restricted, i.e., never to sell it and to use it only for its work in
helping cancer patients. As of the end of the Cancer Institutes fiscal year (December 31),
no title to the building was received by the Institute. How should the Institute record this
transaction?
CASE 2:
On January 1, the Hawaii Cancer Institute has received a promise from the Obama
Foundation to receive a building that the Foundation recently appraised at $200,000but
cost it only $125,000. The Institute promised to keep the building permanently
restricted, i.e., never to sell it and to use it only for its work in helping cancer patients.
After not receiving title by December 30, the Institute inquired as to the status of the
promised building. The Foundation stated that water damage to the building (from last
years flood) has permanently reduced the carrying value of the building to $100,000.
The Foundation had initially hoped to set up a fund drive to help clean up the building.
However, both parties have agreed that as of December 31, this fund drive would not
materialize and the date to receive the building would remain unknown. How should the
Institute now record the promised gift?
CASE 3:
On January 1, the Old Town Heart Association received a $1,000,000 endowment from
the Chamber family. Under terms of the gift, the Association must permanently restrict
the endowmentbut may spend up to half of the interest earned on the gift or half of all
profits earned from selling such investments for operating purposes. The Association
immediately invested the gift proceeds in some blue chip stocks. Afterwards, the
Association spent half of the $50,000 dividends earned from the Chamber portfolio for
operating purposes. Where in the Statement of Cash Flows (i.e., operating, investing, or
financing activities) should the Association report these transactions?

CASE 4:
On April 15, the City of Old Putz invests its available excess cash with an investment
broker. The investment broker then purchases 90-day commercial paper from a set of
blue chip companies. On June 30, the last day of the Citys fiscal year, the City planned
to roll over the commercial paper when they mature. However, interest rates fell
dramatically in late June resulting in a lower value for the maturing commercial paper.
More importantly, the City now expects to receive a much lower return on its investment
after reinvestment. Should the City make any disclosures or adjustments regarding these
transactions?
CASE 5:
Mount Pleasant Epilepsy Association is a not-for-profit agency. Joseph Howard is the
Chair of its Voluntary Board of Directors. He is also the owner of Howard Insurance
Company. The Association rents its facilities from Howard Insurance Company. The
Company charges the Association $10 per square foot of space per month. This amount is
considerably below the Citys average market rate of $14 for similar office space. The
rental rates have not changed during the five years that the Association has occupied its
present location. However, no formal agreement for this rental situation exists. Joseph has
hinted that one day the Company may ask the Association to significantly increase its
rental payments or move to another location. What disclosures, if any, should the
Association make regarding this situation?
CASE 6:
The Oakland County Hospital performs lots of work for Medicare and Medicaid patients.
This results in both reimbursement of certain operating costs and some profit.
Transfers among related subsidiaries within the Hospital also contain some Medicare
and Medicaid profits. For example, the pharmacy, nursing and anesthesiology
subsidiaries often all participate in a Medicare and Medicaid surgical operation. When
the Hospital prepares consolidated financial statements, it asks you whether the Hospital
should eliminate gains on such transactionsespecially if others consider such
transactions as dealings with regulated affiliates.

CASE 7: Some community leaders in St. Paul, MN desire a major league baseball team
to relocate there. They want to build a domed stadium to attract such a team. After asking
the City to help finance it, the City agreed to issue Stadium Bonds for this capital
purpose. These bonds would not become part of the Citys consolidated financing,
reporting entity. Also, the City would neither guarantee nor warrant the repayments of
any proceeds. The City has asked how to account for these proposed transactions.
CASE 8: The City of James has $10 million of 10% bonds payable in its financial
statements. These bonds contain a call provision. The Agent Company told the City that it
will help find parties to call back the old bond and refinance the bonds with 7% interest
payments. The new bonds will not change the original redemption dates from the old
bonds. However, Agent Company demands a $100,000 service charge for its role in
these transactions. While the City Council recognizes the benefits of the proposed
services, the City is unsure how to disclose such payments when the transactions are
completed. Thus, City asks its accountants for guidance.
CASE 9: The City of Mall uses a June 30th year-end. On March 1, the City hired Frank
Sears as its City Manager at an annual salary of $100,000. Franklike all other
employeesearns 12 vacation days per year for the first 10 years with the City.
Thereafter, he earns 18 vacation days per year.
Employees who leave the City receive payment for all vested, unused vacation days.
However, all employees must work for at least six months before they can take any
vacation days. The City believes that Frank will be an excellent employee and assumes
that he will work past the required six months. Should the City accrue vacation time for
the City Manager?

AUDITING Cases
Case 1: In year 1, Joe Josephs, CPA, reviewed Lander Companys financial statements.
However, in year 2, the Lander Company hired Tom Holstrum, CPA, to audit its
financial statements. Should Tom meet with Joe, and would Joe be considered as a
predecessor auditor?
Case 2: In Tom Holstrums audit of the Lander Company, Tom seeks to obtain an
attorney representation letter regarding any, undisclosed potential corporate liabilities.
John Engle, the Lander Company General Council responded to this letter by citing
American Bar Association (ABA) language that emphasizes attorney-client privilege
regarding such unasserted claims. E.g., the letter uses such phrases as it would be
inappropriate for this firm to respond to such general inquiries and we can not
comment upon the adequacy of the companys listing, if any, of unasserted possible
claims or assessments. Do such responses constitute limitations in the scope of the
audit?
Case 3: Mary Howard, CPA, has long audited the Wheat City Grain Companys financial
statements. Much of Wheat Citys assets consist of wheat stored in three of its grain
elevators, and the Company maintains perpetual inventory records of the quantity of
wheat stored there. Concurrently, on a surprise basis, at different times each month, state
grain inspectors also count the quantity of wheat found in these elevatorsand have
found no material differences in the perpetual records for the five years that they have
performed this function. To save both time and audit fees, Mary wants to rely on the state
inspectors counts instead of her making independent counts thereof. Can Mary do this?
Case 4: Aaron Jones, CPA, is auditing the current years financial statements of Low
Company, a publicly traded company. Aaron notices some major fluctuations in Lows
fourth quarter of the previous years financial statement balances. He is aware that
security holders of publicly traded company stock that does not separately report fourth
quarter results often impute such results by subtracting data based on third quarter
interim balances from the year-end balances. Thus, companies should report such
significant events as disposals of segments and other unusual items for that quarter as a
note to the annual financial statements. Aaron notices that Low makes such disclosures,
but is unsure if his firm should audit these additional, supplementary disclosures.
Case 5: Joe Josephs, CPA, issued an unqualified audit opinion for the Johnson
Companys previous years financial statements, which used a modified accrual basis of
accounting, which is considered as an other comprehensive base of accounting
(OCBOA). In the current year, Johnson switched to (normal, full) accrual system, and
wants to show comparative financial statements for the two years. Should Joe require the
restatement of the prior years financial statements using this new basis of accounting,
and what disclosures, if any, should be made to the financial statements and Joes audit
report?
Case 6: Hugo Crossman, CPA, issued a review statement for the CUNY Company for
last year and a compiled statement for them in the current year. During the current year,

Hugo purchased some CUNY securities, which made him lose his independencea fact
noted in his CPA compilation report. Now, the CUNY Company management wants
Hugo to issue comparative two year financial statements (last year and this year). Can
Hugo re-issue his review report now that he is no longer independent of the CUNY
Company?
Case 7: Joseph Josephs, CPA is auditing the Elder Companys current years annual
financial statements and notices that the Company has violated the 2.1 to 1.0 current ratio
requirements as part of its debt agreement with the Sunshine Bank. The companys
current ratio is 1.85 to 1. Elders management believes (strongly) that it will improve
their current ratio during the 90-day grace period. Nonetheless, the bank has the right
to call in the entire $2 million loan. However, Joseph is not so sure and must issue his
report before this grace period expires. Should Joseph qualify his opinion or demand that
Elder re-classify this loan as a short-term liability, in light of the above circumstances?
Case 8: During Joseph Josephs, CPA, audit of the Belton Companys prior years
financial statements, he notices that sales and profits have fallen dramatically from their
previous year highs. His subsequent (January 20, current year) discussion with John
Land and Jill Her (equal 50% shareholders of the Company) indicate that John recognizes
that he spent much less time in the previous year with the business than he did in prior
years. He agreed to refund $100,000 of his $1 million previous years compensation
immediately, and John and Jill agreed that he would receive his original $1 million
compensation in future years (as long as he re-dedicated his efforts on behalf of the
company). Joseph then reduced the Belton Companys previous years salary expense for
the $100,000 refund, since the parties attributed these transactions to previous years
events. He then issued the audited financial statements on March 2, of the current year.
However, on May 2, of the current year, the Sunshine bank called him and asked him to
attribute the $100,000 to the current years events (since it was paid then) and to recall
and re-issue the financial statements. Should Joseph require the recall and re-issuance of
the previous years financial statements?
Case 9: Joseph Josephs is completing his audit of the Bolton Companys current years
financial statements and reads in SAS 114 (AU Section 380) that he should communicate
his results with members of Boltons audit committee. But, despite many requests for
many years, Bolton has established no such committeeprimarily since it has only two
stockholders. What should Joseph do now?
Case 10: You are auditing the financial statements of Air Service Inc., an airplane
wholesaler that purchases various types of corporate jets for sale to different companies
or individuals. Prior to the sale of an airplane, Air Service utilizes the jet for charter
service. In reviewing the financial statements, you noticed that Air Service reports these
jets before selling them as part of fixed assets and depreciates such planes. The
engagement partner questions such accounting and requests that you research this issue as
to the proper treatment for these jets used in the chartering service.

TAX Cases
Instructions: In writing a tax memo begin the discussion of the law with at least one
paragraph on the relevant Code language. Pinpoint the location of the relevant language
in the Code as precisely as possible. Then add a paragraph(s) on any relevant Treasury
Regulation. Then describe any relevant cases or Revenue Rulings. Write clearly and
concisely so that the tax memo is normally limited to three pages.
Write a memo identifying the legal ISSUE(s), conclusion, list of relevant authorities,
discussion of the law, and the application of the law. Use these subheadings, as it is not
enough to describe the law. For each CASE discuss and apply at least one relevant
CASE or revenue ruling. The most important aspects of the memo are the ISSUE
statement(s) and the application of the law to the problem facts. The application should
integrate reference to every source of law previously discussed. Do not just answer the
question asked in the problem.
CASE 1. When Gross Income is Accrued (Basic)
Taxpayer is a securities firm which uses the accrual method of accounting.
Taxpayer executes stock trades and performs settlement functions. Settlement
functions include recording the sale and confirming it with the customer. Trades
made on December 28, 20X5, until the end of the month are not settled until
January of 20X6. Taxpayer made $1,000,000 of net commissions from these
trades in late December. Since the security is not credited to the customers
account until settlement date, taxpayer wants to declare the income on the
settlement dates in 20X6. Taxpayer does not receive the money until January
20X6. Advise the taxpayer.
ISSUE:
Whether an accrual basis securities firm has gross income under sec. 451(a) on
the trading date or the next year on the settlement date when all the work is
performed, payment is due, and money received?

CASE 2. Business Deductions? (Basic)

For the past two years, Minsu, a Korean American, has worked as a high school
physical education teacher. He is also a body-builder and a part-time graduate
student in educational technology at State University. In preparing for a masters
thesis he has decided to participate in Arnolds World Body-building training
program and analyzing advanced technology used to help students absorb
physical education. Arnolds training program has a regular faculty, curriculum,
an enrolled body of students, and advanced technology in its gym equipment.

Minsu earned $4,000 during the fall 20X5 as a body-builder by coming in second
in the state contest. Minsu paid $3,000 in spring 20X5 for his masters degree
tuition at State University for one class on advanced computer technology and
another $5,000 to participate at Arnolds. How much can Minsu deduct? Minsu
knows about relevant educational tax credits and want you to focus just on the
deductions.

CASE 3. Stock purchased by an employee (Intermediate)

Sally became an employee of DotGismo, Inc., a privately held firm. On December
15, 20X3, Sally was allowed to buy 20,000 shares of DotGismo stock for $40,000
dollars. When Sally bought the stock, each share was worth $2. DotGismo
retained the right to repurchase each share for $2 original purchase price if Sally
leaves DotGismo at any time during the next two years for any reason. DotGismo
stock increased to $5 per share in December 15, 20X5, when the two year
restriction ended. Sally sold the stock on January 18, 20X6 for $9 per share, after
the announcement of a new patent for DotGismo. Advise Sally roughly how much
tax she must pay and for what year(s). Assume Sally is in the 35% tax bracket for
ordinary income and 15% for long term capital gains.

CASE 4. Deduction for Foreign Travel (Intermediate)

Sylvia is a professor in business at the University of Hawaii. She went on
sabbatical for an academic year to take courses in Chinese at National Taiwan
University in Taipei, Taiwan, to expand her knowledge of international business
and to conduct research. On weekends and during the three week winter break
Sylvia went sight-seeing by herself around the island, but one time gave a lecture
in Tainan, Taiwan. Sylvia has documented her expenses and saved her receipts.
Advise Sylvia.

CASE 5. Income Sourcing International Tax (Advanced)

Hidetoshi was a world-renowned rock star from NewCountry. Sony-USA Records
contracted with Hidetoshi to produce records. Sony-USA Records retained all
intellectual property rights in the recordings. The contract granted Hidetoshi
payments or royalties based upon future sales of recordings. Hidetoshi paid
taxes on the payments in NewCountry as royalties. The U.S.-NewCountry treaty
exempts royalties from tax in the U.S. However, NewCountry tax treaty, did not
define royalties or compensation for personal services. The IRS has told
Hidetoshi, his contract with Sony-USA generates personal service income in the
United States. Advise Hidetoshi.

CASE 6. Contingent liabilities in a Section 351 transfer (Advanced)

Xco is an accrual basis taxpayer with multiple lines of businesses. One business
is a gas station. The land underneath the gas station did not appear contaminated
when Xco purchased it. However, the land now has potential soil and
groundwater problems (environmental liabilities). Xco engaged in a section 351
tax free exchange transferring the gas station to a new subsidiary Sco in exchange
for the stock of Sco and the assumption of the environmental liabilities. Before
the transfer, Xco did not take any environmental remediation efforts to clean up
the lands soil and groundwater problems. How is the basis of Xcos land
determined?