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Auditing & Assurance Services 6th Edition by Timothy Louwers
Edition 6ISBN: 978-0077862343Auditing & Assurance Services 6th Edition by Timothy Louwers
Edition 6ISBN: 978-0077862343 Exercise 44
Related-Party Transaction Valuation. Follow the instructions in the preceding the case in 10.59. Write the audit approach section like the cases in the chapter.
In Plane View
Whiz Corporation owned 160,000 shares of Wing Company stock, carried on the books as an investment in the amount of $6,250,000. Whiz bought a used airplane from Wing, giving in exchange (1) $480,000 cash and (2) the 160,000 Wing shares. Even though the quoted market value of the Wing stock was $2,520,000, Whiz valued the airplane received at $3,750,000, indicating a stock valuation of $3,270,000. Thus. Whiz recognized a loss on disposition of the Wing stock in the amount of $2,980,000.
Whiz justified the airplane valuation with another transaction. On the same day it was purchased. Whiz sold the airplane to the Mexican subsidiary of one of its subsidiary companies (two layers down, but Whiz owned 100 percent of the first subsidiary, which in turn owned 100 percent of the Mexican subsidiary). The Mexican subsidiary paid Whiz with US$25,000 cash and a promissory note for US$3,725,000 (market rate of interest).
The transaction was within the authority of the chief executive officer, and company policy did not require a separate approval by the board of directors. A contract of sale and correspondence with Wing detailing the terms of the transaction were in the files. Likewise, a contract of sale to the Mexican subsidiary, a copy of the deposit slip, and a memorandum of the promissory note were on file. The note itself was kept in the company vault. None of the Wing papers cited a specific price for the airplane.
Whiz overvalued the Wing stock and justified it with a related-party transaction with its own subsidiary company. The loss on the disposition of the Wing stock was understated by $750,000.
In Plane View
Whiz Corporation owned 160,000 shares of Wing Company stock, carried on the books as an investment in the amount of $6,250,000. Whiz bought a used airplane from Wing, giving in exchange (1) $480,000 cash and (2) the 160,000 Wing shares. Even though the quoted market value of the Wing stock was $2,520,000, Whiz valued the airplane received at $3,750,000, indicating a stock valuation of $3,270,000. Thus. Whiz recognized a loss on disposition of the Wing stock in the amount of $2,980,000.
Whiz justified the airplane valuation with another transaction. On the same day it was purchased. Whiz sold the airplane to the Mexican subsidiary of one of its subsidiary companies (two layers down, but Whiz owned 100 percent of the first subsidiary, which in turn owned 100 percent of the Mexican subsidiary). The Mexican subsidiary paid Whiz with US$25,000 cash and a promissory note for US$3,725,000 (market rate of interest).
The transaction was within the authority of the chief executive officer, and company policy did not require a separate approval by the board of directors. A contract of sale and correspondence with Wing detailing the terms of the transaction were in the files. Likewise, a contract of sale to the Mexican subsidiary, a copy of the deposit slip, and a memorandum of the promissory note were on file. The note itself was kept in the company vault. None of the Wing papers cited a specific price for the airplane.
Whiz overvalued the Wing stock and justified it with a related-party transaction with its own subsidiary company. The loss on the disposition of the Wing stock was understated by $750,000.
Explanation
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The quoted price of investment should be...
Auditing & Assurance Services 6th Edition by Timothy Louwers
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