Whitlow & Company is a brokerage firm registered under the Securities Exchange Act of 1934

Auditing P 5-28 (ALL PARTS)

Part 1
Whitlow & Company is a brokerage firm registered under the Securities Exchange Act of 1934. The act requires such a brokerage firm to file audited financial statements with the SEC annually. Mitchell & Moss, Whitlow’s CPAs performed the annual audit for the year ended December 31, 2009, and rendered an unqualified opinion, which was filed with the SEC along with Whitlow’s financial statements. During 2009, Charles, the president of Whitlow & Company, engaged in a huge embezzlement scheme that eventually bankrupted the firm. As a result, substantial losses were suffered by customers and shareholders of Whitlow & Company, including Thaxton, who had recently purchased several shares of stock of Whitlow & Company after reviewing the company’s 2009 audit report. Mitchell & Moss’s audit was deficient; if they had complied with auditing standards, the embezzlement, nor can their conduct. However, Mitchell & Moss had no knowledge of the embezzlement, nor can their conduct be categorized as reckless.

Required: Answer the following questions setting forth reasons for any conclusions stated.
a. What liability to Thaxton if any, does Mitchell & Moss have under the Securities Exchange Act of 1934?
b. What theory or theories of liability, if any, are available to Whitlow & Company’s customers and shareholders under common law?

Part 2
Jackson is a sophisticated investor. As such, she was initially a member of a small group that was going to participate in a private placement of $1 million of common stock of Clarion Corporation. Numerous meetings were held between management and the investor group. Detailed financial and other information was supplied to the participants. Upon the eve of completion of the placement, it was aborted when one major investor withdrew. Clarion than decided to offer $2.5 million of Clarion common stock to the public pursuant to the registration requirements of the Securities Act of 1933. Jackson subscribed to $300,000 of the Clarion public stock offering. Nine months later, Clarion’s earnings dropped significantly and as a result, the stock dropped 20% beneath the offering price. In addition, the Dow Jones Industrial Average was down 10% from the time of the offering.

Jackson sold her shares as a loss of $60,000 and seeks to hold all parties liable who participated in the public offering, including Clarion’s CPA firm of Allen, Dunn, and Rose. Although the audit was performed to conformity with auditing standards, there were some relatively minor misstatements. The financial statements of Clarion Corporation, which were part of the registration statement, contained minor misleading facts. It is believed by Clarion and Allen, Dunn, and Rose that Jackson’s asserted claim is without merit.

Required: Answer the following questions setting forth reasons for any conclusions stated.
a. If Jackson sues under the Securities Act of 1933, what will be the basis of her claim?
b. What are the probable defenses that might be asserted by Allen, Dunn, and Rose in light of these facts?


Click here for the solution: Whitlow & Company is a brokerage firm registered under the Securities Exchange Act of 1934

Gordon & Groton, CPA's were the auditors of Bank & Company, a brokerage firm and member of a national stock exchange

Auditing P 5-26 Gordon & Groton, CPA's were the auditors of Bank & Company, a brokerage firm and member of a national stock exchange. Gordon & Groton audited and reported on the financial statements of Bank, which were filed with the Securities and Exchange Commission.
Several of Bank's customers were swindled by a fraudulent scheme perpetrated by Bank's president, who owned 90% of the voting stock of the company. The facts establish that Gordon & Groton were negligent but not reckless or grossly negligent in conduct of the audit, and neither participated in the fraudulent scheme or knew of its existence.

The customers are suing Gordon & Groton under the antifraud provisions of Section10b and Rule 10b-5 of the securities Exchange Act of 1934 for aiding and abetting the fraudulent scheme of the president. The customer’s suit for fraud is predicated exclusively on the nonfeasance of the auditors in failing to conduct a proper audit, thereby failing to discover the fraudulent scheme.

Required:
Answer the following questions, setting forth reasons for any conclusions stated:
a. What is the probable outcome of the lawsuit?
b. What other theory of liability might the customers have asserted?


Click here for the solution: Gordon & Groton, CPA's were the auditors of Bank & Company, a brokerage firm and member of a national stock exchange

Jerry transfers property having a $32,000 adjusted basis and a $50,000 FMV to Emerald Corporation in exchange for all of Emerald’s stock

C:2-44. Jerry transfers property having a $32,000 adjusted basis and a $50,000 FMV to Emerald Corporation in exchange for all of Emerald’s stock worth $15,000 and Emerald’s assumption of a $35,000 mortgage on the property.

a. What is the amount of Jerry’s recognized gain or loss?
b. What is Jerry’s basis in the Emerald stock?
c. What is Emerald’s basis in the property?
d. How would your answers to Parts a through c change if the mortgage assumed by Emerald were $15,000 and the Emerald stock were worth $35,000?


Click here for the solution: Jerry transfers property having a $32,000 adjusted basis and a $50,000 FMV to Emerald Corporation in exchange for all of Emerald’s stock

Denise contributes the following assets to a partnership in exchange for a 25% partnership interest

48. Denise contributes the following assets to a partnership in exchange for a 25% partnership interest:

FMV Basis
Cash $20,000 20,000
Office equipment 12,000 5,000
Auto 20,000 6,000

What is Denise’s beginning basis in her partnership interest?


Click here for the solution: Denise contributes the following assets to a partnership in exchange for a 25% partnership interest

On June 1 of the current year, Patti contributes equipment with a $45,000 basis and a $35,000 FMV in exchange for a partnership interest

49. On June 1 of the current year, Patti contributes equipment with a $45,000 basis and a $35,000 FMV in exchange for a partnership interest. She purchased the equipment three years ago.

a. What is Patti’s basis in her partnership interest?
b. What is Patti’s holding period of her partnership interest?
c. What is the basis of the equipment in the hands of the partnership?
d. What is the holding period of the equipment in the hands of the partnership?
e. How will the partnership depreciate the equipment in the year of contribution?


Click here for the solution: On June 1 of the current year, Patti contributes equipment with a $45,000 basis and a $35,000 FMV in exchange for a partnership interest

In 2008, Adrianna contributed land with a basis of $16,000 and a fair market value of $25,000 to the A&I Partnership in exchange for a 25% interest in capital and profits

In 2008, Adrianna contributed land with a basis of $16,000 and a fair market value of $25,000 to the A&I Partnership in exchange for a 25% interest in capital and profits. In 2011, the partnership distributes this property to Isabel, also a 25% partner, in a no liquidating distribution. The fair market value has increased to $30,000 at the time the property is distributed. Isabel’s and Adrianna’s bases in their partnership interests are each $40,000 at the time of the distribution.

a. How much gain or loss, if any, does Adrianna recognize on the distribution to Isabel? What is Adrianna’s basis in her partnership interest following the distribution?
b. What is Isabel’s basis in the land she received in the distribution?
c. How much gain or loss, if any, does Isabel recognize on the distribution? What is Isabel’s basis in her partnership interest following the distribution?
d. How much gain or loss would Isabel recognize if she later sells the land for its $30,000 fair market value? Is this result equitable?
e. Would your answers to (a) and (b) change if Adrianna originally contributed the property to the partnership in 2000?

Click here for the solution: In 2008, Adrianna contributed land with a basis of $16,000 and a fair market value of $25,000 to the A&I Partnership in exchange for a 25% interest in capital and profits

Spinone Corporation directs its sole shareholder to exchange all of his common stock valued at $200,000 (basis of $50,000) for $100,000 of common stock, $80,000 of preferred stock, and $20,000 in cash

Spinone Corporation directs its sole shareholder to exchange all of his common stock valued at $200,000 (basis of $50,000) for $100,000 of common stock, $80,000 of preferred stock, and $20,000 in cash. In addition, Spinone directs its sole bondholder to exchange her $150,000 of bonds paying 6.0% for $170,000 of bonds paying 5.3% How are these transactions treated for tax purposes by the shareholder, the bondholder, and Spinone?

Click here for the solution: Spinone Corporation directs its sole shareholder to exchange all of his common stock valued at $200,000 (basis of $50,000) for $100,000 of common stock, $80,000 of preferred stock, and $20,000 in cash

Using Exchange Rates Take a look back at Figure 21.1 to answer the following questions

Using Exchange Rates Take a look back at Figure 21.1 to answer the following questions:

a) If you have $100, how many Euros can you get?

b) How much is one euro worth?

c) If you have 5 million Euros, how many dollars do you have?

d) Which is worth more, a New Zealand dollar or a Singapore dollar?

e) Which is worth more, a Mexican peso or a Chilean peso?

f) How many Mexican pesos can you get for a euro? What do you call this rate?

g) Per unit, what is the most valuable currency of those listed? The least valuable?

Click here for the solution: Using Exchange Rates Take a look back at Figure 21.1 to answer the following questions

(Forward Exchange Rate) Use the information in Figure 21.1 to answer the following questions

(Forward Exchange Rate) Use the information in Figure 21.1 to answer the following questions:

a) What is the six-month forward rate for the Japanese yen in yen per U.S. dollar? Is the yen selling at a premium or a discount? Explain.

b) What is the three-month forward rate for Canadian dollars in U.S. dollars per Canadian dollar? Is the dollar selling at a premium or a discount? Explain.

c) What do you think will happen to the value of the dollar relative to the yen and the pound, based on the information in the figure? Explain.

Click here for the solution: (Forward Exchange Rate) Use the information in Figure 21.1 to answer the following questions

(Using Spot and Forward Exchange Rates) Suppose the spot exchange rate for the Canadian dollar in Can $1.05 and the six- month forward rate is Can $1.07

(Using Spot and Forward Exchange Rates) Suppose the spot exchange rate for the Canadian dollar in Can $1.05 and the six- month forward rate is Can $1.07.

a) Which is worth more, a U.S. dollar or a Canadian dollar?

b) Assuming absolute PPP holds, what is the cost of the United States of an Elkhead beer if the price in Canada is Can$2.50? Why might the beer actually sell at a different price in the United States?

c) Is the U.S. dollar selling at a premium or a discount relative to the Canadian dollar?

d) Which currency is expected to appreciate in value?

e) Which county do you think has higher interest rates- the United States or Canada? Explain.

Click here for the solution: (Using Spot and Forward Exchange Rates) Suppose the spot exchange rate for the Canadian dollar in Can $1.05 and the six- month forward rate is Can $1.07