Description
CA20-7 ETHICS (Nonvested Employees—An Ethical Dilemma) Thinken Technology recently merged with College Elec-tronix (CE), a computer graphics company. In performing a comprehensive audit of CE’s accounting system, Gerald Ott, internal audit manager for Thinken Technology, discovered that the new subsidiary did not record pension assets and liabilities, subject to GAAP.
The net present value of CE’s pension assets was $15.5 million, the vested benefit obligation was $12.9 million, and the projected benefit obligation was $17.4 million. Ott reported this audit finding to Julie Habbe, the newly appointed controller of CE. A few days later, Habbe called Ott for his advice on what to do. Habbe started her conversation by asking, “Can’t we eliminate the negative income effect of our pension dilemma simply by terminating the employment of nonvested employees before the end of our fiscal year?”
Instructions
How should Ott respond to Habbe’s remark about firing nonvested employees?
Explanation & Answer
Here is the answer. Thanks
Thinken Technology did not record pension assets and liabilities as per accounting rules
of the GAAP. Firing of the employees will not be a realistic and feasible solution for the
unrecorded pension plan of the company. Firing of the productive employees to avoid
capitalization of a liability,...
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