Accy 401X
Assignment Sheet
Monday, August 14-Friday, August 25
Monday, August 14
Case: Patton, Corp.
Reading: Chapter 6, pp. 303-318, Stickney and Weil.
188-027
Assignment:
Background: Patten Corporation began operations in New England in the early 1980s. In 1982
the firm had revenues of $2.8 million and net income of $188,000. By 1986, when Patten went
public, it had revenues of $33 million and net income of $4.0 million. With its rapid growth in
the booming New England real estate market, Patten’s market value exceeded $60 million.
By 1988 Patten’s sales grew to $120 million and net income to $15 million. Unfortunately, in
1990 the New England real estate market collapsed. Patten lost $12.9 million in 1990 and $32.2
million in 1991. The loss resulted from two primary factors. First, customers defaulted on their
loans. In most cases, Patten simply repossessed the land. Second, the value of the land held for
resale dropped dramatically, and the value of the repossessed land was usually less than Patten’s
original cost. Patten’s stock price dropped from $20 per share to $.375 in 1991.
Patten recognizes the entire sale price as revenue even though a typical down payment is only
10% of the purchase price. Suppose Patten purchases land for $50,000, divides it into two
parcels, spends $30,000 on sales, marketing, and administration, and then sells the two parcels
for $50,000 apiece. Assume Patten receives 10% of the sales price immediately ($10,000) and
10% ($10,000) in each of the following 9 years. The $30,000 of sales, marketing and
administration costs would be expensed immediately.
a. Under its existing revenue recognition method, Patten would record the
following:
Current method
Revenue
Cost of goods sold
Gross profit
SG&A expenses
Net income (loss)
Year 1
$100,000
$ 50,000
$ 50,000
$ 30,000
$ 20,000
Years 2-10
$ -0$ -0$ -0-0$ -0-
b. The first paragraph, page 5, lists two alternate revenue recognition methods,
percentage-of-completion and the installment sales method. The percentage-ofcompletion method applies to real estate developers or those who produce
products with long production cycles, such as ships. Patten could have used the
installment method, where it recognizes revenues when they are received. If
Patten received a 10% down payment in the first year, it would record revenue of
$10,000 and land cost (cost of sales) of 10% of the total land cost ($5,000):
1
Installment method
Revenue
Cost of goods sold
Gross profit
SG&A expenses
Net income (loss)
Year 1
$10,000
$ 5,000
$ 5,000
$30,000
($25,000)
Years 2-10
$10,000
$ 5,000
$ 5,000
-0$ 5,000
c. If payment is highly uncertain, Patten could use the cost recovery method. Cost
of goods sold equals cash received until payments exceed the total cost of the
goods sold. Thereafter, as payments are received, they are pure profit since there
are no matching costs:
Cost recovery method
Revenue
Cost of goods sold
Gross profit
SG&A expenses
Net income (loss)
Year 1
$10,000
$10,000
$ -0$30,000
($30,000)
Years 2-5
$10,000
$10,000
$ -0-0$ -0-
Years 6-10
$10,000
-0$10,000
-0$10,000
1.
Which of the above three methods best reflects Patten’s economic performance?
Explain.
2.
Assume in the above example that one of the two customers eventually defaults and
returns the land to Patten. The other customer pays the entire $50,000 price over five
years. How many payments must the defaulting customer make for Patten to break
even? What assumptions did you need to make to reach your conclusion?
3.
How much cash did Patten raise through the sale of stock in 1986? How much did
the firm’s original owner (Harry Patten) invest in the company prior to 1986?
4.
Could Patten have obtained financing through the public sale of stock in 1986 if it
had used the Installment method or the cost recovery method of revenue recognition?
Explain.
5.
Evaluate Patten’s Statement of Changes in Financial Position on page 17. How did
Patten finance its expansion?
6.
Evaluate Footnote 8 on Related Party Transactions, pp. 23-24.
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Tuesday, August 15
Case: Circuit City Stores, Inc. (A)
Reading: Chapter 6, pp. 319-329, Stickney and Weil.
Assignment: Questions at the end of the case.
Wednesday, August 16
Case: LIFO or FIFO? That Is the Question
Reading: Chapter 7, pp. 252-380, Stickney and Weil.
Assignment: Questions and the end of the case
Thursday, August 17
Case: Depreciation at Delta Air Lines and Singapore Airlines (A)
Reading: Chapter 8, pp. 410-441, Stickney and Weil
191-086
192-046
198-001
Friday, August 18
Case: Kansas City Zephyrs Baseball Club, Inc. (To be passed out Monday)
187-088
Reading: Chapter 5, skim pp. 231-260, Stickney and Weil.
Assignment:
1.
Evaluate the five disputed items in Exhibit 6, p. 12 of the case. If you were the arbitrator, for
each of the five items, would you favor the players or the club owners?
2.
The case mentions several other items of contention, such as deferred salary compensation,
parking concessions, and television and radio broadcast rights. Be prepared to discuss how
those items influence reported profits.
3.
These same issues are being raised in 2000 as Major League Baseball tries to convince the
Players’ union to agree to salary caps. The attached press release from the Major League
Baseball Commissioner’s Office describes findings of the Blue Ribbon Panel on Baseball
Economics. Do you believe the Panel members are qualified to evaluate technical accounting
issues, as described in the Kansas City Zephyrs Baseball Club, Inc. case?
4.
Do you believe it is possible to evaluate baseball team profitability without knowing details
of accounting?
Friday, August 25 (short week)
Case: Baylor Books
Reading: Chapter 1, pp. 3-14, Stickney and Brown
Assignment: Questions at the end of the case.
198-082
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