374 W5 dq1-5

1.Assume that the following data relative to Eddy Company for 2014 is available:

Net Income$1,400,000

Transactions in Common Shares  ChangeCumulative

Jan. 1, 2014, Beginning number500,000

Mar. 1, 2014, Purchase of treasury shares(60,000)440,000

June 1, 2014, Stock split 2-1440,000880,000

Nov. 1, 2014, Issuance of shares120,0001,000,000

8% Cumulative Convertible Preferred Stock

Sold at par, convertible into 200,000 shares of common;

Outstanding for all of 2014.$1,000,000

Stock Options

Exercisable at the option price of $25 per share. Average 

market price in 2014, $30.  Outstanding for all of 2014.60,000 shares

REQUIRED:

Compute both basic and diluted earnings per share.

2.Your client has asked you to provide guidance on the following potential accounting changes:

(1)Change from straight-line method of depreciation to sum-of-the-years’-digits

(2)Change from the cash basis to accrual basis of accounting

(3)Change from FIFO to LIFO method for inventory valuation purposes

(4)Change from presentation of statements of individual companies to presentation of consolidated statements

(5)Change due to failure to record depreciation in a previous period

(6)Change in the realizability of certain receivables

(7)Change from LIFO to FIFO method for inventory valuation purposes

REQUIRED:

For each of the items above: 

• Indicate the type of accounting change, using one of the following codes:

E – Change in estimate

EP – Change in estimate resulting from change in principle

N – Not an accounting change (correction of an error)

PP – Change in principle reported prospectively

PR – Change in principle reported retrospectively

R – Change in reporting entity

• Indicate whether or not restatement of prior year financial statements is necessary.
• Indicate whether the cumulative effect on prior years’ income is reported.

3.  Yarman Inc. began business on January 1, 2013. Its pretax financial income for the first 2 years was as follows:

2013$  95,000

2014$180,000

The following items caused the only differences between pretax financial income and taxable income.

• In 2013, the company collected $90,000 of rent; of this amount, $30,000 was earned in 2013; the other $60,000 will be earned equally over the 2014-2015 period. The full $90,000 was included in taxable income in 2013.

• The company pays $5,000 a year for life insurance on officers.

• In 2014, the company terminated a top executive and agreed to $60,000 of severance pay. The amount will be paid $20,000 per year for 2014-2016. The 2014 payment was made. The $60,000 was expensed in 2014. For tax purposes, the severance pay is deductible as it is paid.

• The enacted tax rates existing at December 31, 2013 are 35% for 2013 and 40% for 2014 and beyond.

REQUIRED:

(a)Determine taxable income for 2013 and 2014.

(b)Compute the total deferred tax asset / (liability) at the end of 2013 and 2014.

(c)Prepare the journal entry to record income taxes for 2013 and 2014.

(d)Compute net income for 2013 and 2014.

(e)Compute the effective income tax rate for 2013 and 2014.

The Forum assignment this week is to discuss how the Supreme Court determines which cases to hear, which cases not to take, and why.

What change management strategies has Paul Otellini used to help introduce the various changes at Intel? Discuss evidence that some employees are resisting these changes? What, if anything, can Otellini do to minimize this resistance?

Case Study 15.1: TRANSACT INSURANCE CORPORATION

Steven L. McShane, University of Western Australia, and Terrance Bogyo, WorkSafeBC

TransAct Insurance Corporation (TIC) provides automobile insurance throughout the southeastern United States. Last year, a new president was hired by TIC’s board of directors to improve the company’s competitiveness and customer service. After spending several months assessing the situation, the new president introduced a strategic plan to strengthen TIC’s competitive position. He also replaced three vice presidents. Jim Leon was hired as vice president of claims, TIC’s largest division, with 1,500 employees, 50 claims center managers, and 5 regional directors.

Jim immediately met with all claims managers and directors, and he visited employees at TIC’s 50 claims centers. As an outsider, this was a formidable task, but his strong interpersonal skills and uncanny ability to remember names and ideas helped him through the process. Through these visits and discussions, Jim discovered that the claims division had been managed in a relatively authoritarian, top-down manner. He could also see that morale was very low and employee- management relations were guarded. High workloads and isolation (adjusters work in tiny cubicles) were two other common complaints. Several managers acknowledged that the high turnover among claims adjusters was partly due to these conditions.

Following discussions with TIC’s president, Jim decided to make morale and supervisory leadership his top priority. He initiated a divisional newsletter with a tear-off feedback form for employees to register their comments. He announced an open-door policy in which any claims division employee could speak to him directly and confidentially without going first to the immediate supervisor. Jim also fought organizational barriers to initiate a flextime program so that employees could design work schedules around their needs. This program later became a model for other areas of TIC.

One of Jim’s most pronounced symbols of change was the “Claims Management Credo” outlining the philosophy that every claims manager would follow. At his first meeting with the complete claims management team, Jim presented a list of what he thought were important philosophies and actions of effective managers. The management group was asked to select and prioritize items from this list. They were told that the resulting list would be the division’s management philosophy and all managers would be held accountable for abiding by its principles. Most claims managers were uneasy about this process, but they also understood that the organization was under competitive pressure and that Jim was using this exercise to demonstrate his leadership.

The claims managers developed a list of 10 items, such as encouraging teamwork, fostering a trusting work environment, setting clear and reasonable goals, and so on. The list was circulated to senior management in the organization for their comments and approval and sent back to all claims managers for their endorsement. Once this was done, a copy of the final document was sent to every claims division employee. Jim also announced plans to follow up with an annual survey to evaluate each claims manager’s performance. This concerned the managers, but most of them believed that the credo exercise was a result of Jim’s initial enthusiasm and that he would be too busy to introduce a survey after settling into the job.

One year after the credo had been distributed, Jim announced that the first annual survey would be conducted. All claims employees would complete the survey and return it confidentially to the human resource department where the survey results would be compiled for each claims center manager. The survey asked the extent to which the manager had lived up to each of the 10 items in the credo. Each form also provided space for comments.

Claims center managers were surprised that a survey would be conducted, but they were even more worried about Jim’s statement that the results would be shared with employees. What results would employees see? Who would distribute these results? What happens if a manager gets poor ratings from his or her subordinates? “We’ll work out the details later,” said Jim in response to these questions. “Even if the survey results aren’t great, the information will give us a good baseline for next year’s survey.”

The claims division survey had a high response rate. In some centers, every employee completed and returned a form. Each report showed the claims center manager’s average score for each of the 10 items, as well as how many employees rated the manager at each level of the 5-point scale. The reports also included every comment made by employees at that center.

No one was prepared for the results of the first survey. Most managers received moderate or poor ratings on the 10 items. Very few managers averaged above 3.0 (out of the 5 points) on more than a couple of items. This suggested that, at best, employees were ambivalent about whether their claims center manager had abided by the 10 management philosophy items. The comments were even more devastating than the ratings. Comments ranged from mildly disappointed to extremely critical of the claims managers. Employees also described their long-standing frustration with TIC, high workloads, and isolated working conditions. Several people bluntly stated that they were skeptical about the changes that Jim had promised. “We’ve heard the promises before, but now we’ve lost faith,” wrote one claims adjuster.

The survey results were sent to each claims manager, the regional director, and employees at the claims center. Jim instructed managers to discuss the survey data and comments with their regional manager and directly with employees. The claims center managers, who thought employees would see only the average scores, went into shock when they realized that the reports included individual comments. Some managers went to their regional director, complaining that revealing the personal comments would ruin their careers. Many directors sympathized, but the results were already available to employees.

When Jim heard about these concerns, he agreed that the results were lower than expected and that the comments should not have been shown to employees. After discussing the situation with his directors, he decided that the discussion meetings between claims managers and their employees should proceed as planned. To delay or withdraw the reports would undermine the credibility and trust that Jim was trying to develop with employees. However, the regional director attended the meeting in each claims center to minimize direct conflict between the claims center manager and employees.

Although many of these meetings went smoothly, a few created harsh feelings between managers and their employees. The sources of some comments were easily identified by their content, and this created a few delicate moments in several sessions. A few months after the meetings, two claims center managers quit and three others asked for transfers back to nonmanagement positions in TIC. Meanwhile, Jim wondered how to manage this process more effectively, particularly since employees expected another survey the following year.

Discussion Questions

1.

What symptom(s) exist in this case to suggest that something has gone wrong?

2.

What are the root causes that have led to these symptoms?

3.

What actions should the company take to correct these problems?

Copyright © 2000 Steven L. McShane and Terrance J. Bogyo. This case is based on actual events, but names, the industry, and some characteristics have been changed to maintain anonymity.