Task 24

Logitech was incorrectly recording warranty expenses only in the first quarter after a sale, rather than estimating expenses over the life of the warranty. This led to understating liabilities and overstating income and assets. Top management benefited through higher reported income and larger bonuses. Logitech should have immediately switched to correctly estimating future warranty expenses, which would have decreased reported net income.

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Task 24

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Ton Vossen

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Task 24

1) Can you identify in what way the method used by Logitech to record warranties is violating
accounting standards? What changes should be made to the method in order for it to be in
line with the standards?
They only recorded the warranty expenses which happened in the first quarter after the sale had
been made. This results in later expenses not being recognized. Therefore there were no warranty
expenses after the first quarter.

2) What were the effects of choosing an incorrect method for recording the warranties? How
are these effects related to the potential incentives of top management?
The warranties are understated. This results in assets and net income to be overstated. The liabilities
are understated.

Managers often got bonuses if their company performs well. Top management thus understated the
warranties which leads to less expenses which leads to a higher net income which leads to more
bonuses.

3) How should Logitech have corrected the use of the old method? What would have been
the financial effects of using the appropriate way of correcting the method?
It is not legal to gradually correct your mistake. They should have immediately corrected the old way
and switch to the appropriate warranty estimation. These changes would affect the balance sheet,
income statement and statement of financial position. This change would result in a decrease in net
income because more products fail after the first quarter after the sale has been made.

Task 25
Case 1

1) What types of stock is Kohl’s authorized to issue? How many shares of each type are
authorized to be issued?
800 million common stock and 10 million preferred stock.

2) Approximately how many shares of common stock have been issued as of January 31,
2015?
364 million

3) Approximately how many shares of common stock were outstanding as of January 31,
2015?
364 – 153 = 201 million

4) Why is treasury stock shown as a negative on the balance sheet?

Treasury stock are stocks that are bought back from the shareholders. Since this decreases equity it
is shown as negative.

5) Do Kohl’s accumulated earnings to date exceed its accumulated losses and dividends
declared to date? How do you know?
Yes, the retained earnings are positive which means that revenues exceed costs + dividends.

6) Assume that in 2015, Kohl declared to pay $321 million in cash dividends on 21 July 2015
and paid it on 5 September 2015. On what date would the dividend become a liability for
Kohl? Make the journal entries for the declaration and the payment day.
It would become a liability the moment it is declared.
Date Account Debit Credit
21-7-2015 Cash dividends 321 mil.
Dividends payable 321 mil.

Date Account Debit Credit

5-9-2015 Dividends payable 321 mil.
Cash 321 mil.

Case 2
1) What effect did the increase in treasury stock shares have on Caterpillar’s EPS change in
2014? Explain.
The company buys back stock which results in less outstanding stock. Because of this the company
has to distribute its dividends under less shareholders which increases the earnings per share.

2) What does the journal entry for the purchase of these treasury shares during 2014 look
like, assuming that each share was purchased for $10?
Treasury stock is debited because it decreases shareholder’s equity.

Date Account Debit Credit

2014 Treasury stock 316 mil.
Cash 316 mil.

3) Assume that Caterpillar sells 10 million of treasury shares in 2015 for a price of $12 per
share. What is the journal entry for this transaction?

Date Account Debit Credit

2015 Cash 120 mil.
Treasury shares 100 mil.
Shares premium - 20 mil.
treasury

4) Based on the information above, what effect do you think the company’s performance had
on the CEO’s year-end bonus for 2014? Explain your answer.
This bonus would be lower because the business’ revenue, operating profit, and net income all
declined in 2014. This indicates poor performance from the company.

5) What potential conflicts of interest can you identify in the determination of the CEO’s
compensation package? How might these conflicts be managed or eliminated?
The conflict of interest is that the CEO mainly focuses on his bonus and doesn’t act in best interest of
the company. A way to solve this would be to reward the CEO in the form of stocks rather than cash.
This way the CEO shares the same interests as the shareholders and will act in the best interests of
the company.

Task 26