Frosty Company Case Study
After checking with GAAP, it was determined that Frosty Co. cannot capitalize the interest on the new loan as part of the construction project on the new factory. According to GAAP, three conditions must be met in order for the interest to be capitalized: expenditures for the asset must have been made, activities that are needed to get the asset ready for its use are already in progress, and interest costs are being incurred. Unfortunately, Frosty Co. does not meet the second requirement.
Simon also suggested that they may need to record the ARO, after checking with GAAP, I found that Frosty Co. has a legal obligation to clean up …show more content…
Doug and Jane want the financial statements to look their best for the investors and Board of Directors for the upcoming SEO. If they followed Simons suggestions, the financial statements would not look as attractive as they currently do which is not what they want as it is important that they receive the funds they need for the new investments. Without strong financial statements, they may not have the evidence they need to show that the company has turned around and increased the company's stock price. If they leave the financial statements as they are, the EPS would be $2.21 but if the changes were made based on Simon's suggestions, the EPS would decrease to $2.06. The net income would also decrease from $552,908 to $514,618. This could create problems for Frosty Co. and hurt their chances of receiving the funds they need for the new investments. I can understand that they are under a lot of pressure to provide the best EPS as well as a higher net income on the financial statements and that they are not interested in making any changes that may lower the EPS at such a crucial time for Frosty …show more content…
He also understands what will happen if they are audited and the auditors stumble upon these issues. I think that he will ultimately go to the Board of Directors to voice his opinions and make them aware of what Jane and Doug are trying to do. I also would not be surprised if Doug decided to leave Frosty Co. because he does not agree with Jane and Doug and the whole situation has made him feel uncomfortable and question his position at Frosty Co.
I think Simon should stick up to Jane and Doug regardless of their positions within Frosty Co. It would be unethical for him not to do more and go to the
Board of Directors to express his concerns. You can tell that Jane and Doug know that their actions are wrong when they tell Simon that he will be rewarded if he is a team player, or in other words, stays quiet. They are bribing him which is clearly unethical and illegal. I also feel that once Simon does go to the
Board of Directors that he should really consider whether or not he wants to stay with Frosty Co. or look for another position. I cannot image it would be easy to stay with Frosty Co. after what he has been through in the short amount of time he has been with the