Tuesday, May 25, 2010

What must an auditor consider before accepting a client?

Before accepting an client the accounting auditor should make sure the fee derived from this client is is not a significant amount of the total fees (some accounting bodies suggest 10% of the total fee derived for listed clients and 15% for an unlisted client).  


The auditor should also make sure there are no independence issues. Apart from that ,the auditor should contact the previous auditors to make sure there are no issues that need to be brought to their attention with regards to this particular client. 


The auditor should also make sure they have sufficient resources to perform the audit such as staff with appropriate skills for the particular industry

Friday, May 14, 2010

Corporate Formation Tax Example § 351

Tax Accounting Problem on Corporate Formation under Section 351 of the Internal Revenue Code

A and B organized AB Corporation with initial corporation of $200,000.  A pays $100k in cash and in return gets 1000 shares of stock.  B transfers a building worth $100k, with an adjusted basis of $60k.

(a) Instead of receiving $100k in stock, B gets 100 shares of stock worth $90k and $10k in corporate bonds issued by the corp.  What are the tax consequences? 

B recognizes a $10k gain (up to the amount of the boot - §351(b))

Her new basis in the stock is $60k (the basis in the building) - $10k (of boot) + $10k (of gain recognized) = $70k

Corporations’s basis in the building under §362(a) is $60k + $10k (amt taxpayer recognized) = $70k.


(b) How would the result change if instead of the bonds, she gets $10k worth of 8% preferred stock? 

B recognizes a $10k gain (up to the amount of boot - §351(b)

Basis in stock is $60k basis in building - $10k of boot received + $10k of gain recognized = $60k basis in stock.

Corporations’s basis in the building = $60k (taxpayer’s basis) + $10k gain recognized [by taxpayer] = $70k basis.

Authorized Share Capital, Issued Capital, Paid-up Capital

How do you distinguish between Authorized Share Capital, Issued Capital, and Paid-up Capital in a corporation?

Accounting Answer:

Authorized capital is the amount of shares authorized by the SEC and corporation charter to issue.

Issue Capital is the number of shares actually issued and collected by the corporation.

Paid-up capital is composed of the total stockholders equity before retained earnings are subtracted

Tuesday, May 11, 2010

Marketability or Liquidity Risk

What is considered to be Marketability or Liquidity Risk?

Marketability or Liquidity Risk occurs when a bond issue can be sold at or near its true market value at the time of offering.

In the finance world, the primary measure of marketability or liquidity is the exact size of the point spread between the bid of price, the offer price and the offer quoted by the bond dealer on Wall Street or another financial center.

In reality, when there is a bigger bond dealer spread, there will generally be a greater marketability or liquidity risk associated with the bond issuance. If an investor decides to hold the bond until the maturity date, the marketability or liquidity risk of the bond will be much less than an investor who will only hold the bond on a short-term basis, 

Monday, May 10, 2010

Types of Current Assets

The following list includes many different types of current assets that an accountant might see on a balance sheet:

Example of Current Assets: 


  • Cash in hand 
  • Cash at bank 
  • Bills Receivable 
  • Temporary Investments 
  • Stock/Inventories 
  • Prepaid Expenses 
  • Accrued Incomes 
The sum of all these together is total current assets of a company.

Popular Accounting Problems

The information on this site is for informational purposes only and should not be used as a substitute for the professional advice of an accountant, tax advisor, attorney, or other professional.