Enron and Corporations and Partnerships

1.  Enron 

    Read and respond to ATC 7-7 on page 285. This situation is similar to the Enron scandal from several years ago. Use the College Online Library to research Enron accounting procedures. (Link posted below) In your post, discuss how these accounting procedures affected the company and stockholders.

ERON

http://knowledge.emory.edu/article.cfm?articleid=492

2. Corporations and Partnerships 

    Read and respond to ATC 8-6 on page 319. In your post, describe the advantages and disadvantages of organization forms. Include why most large public health care organizations use the corporate form.

1# Enron

ATC 7-7   Corporate Governance                Sometimes debt is not debt

David Sheridan was a well-respected CPA in his mid-fifties. After spending 10 years at a na-         o tional accounting firm, he was hired by Global, Inc., a multinational corporation headquar- tered in the United States. He patiently worked his way up to the top of Global’s accounting             pr department and in the early 1990s, took over as chief financial officer for the company. As the

Internet began to explode, management at Global, Inc., decided to radically change the nature of its business to one of e-commerce. Two years after the transition, Internet commerce began to slow down, and Global was in dire need of cash in order to continue operations. Manage- ment turned to the accounting department.

Global, Inc., needed to borrow a substantial amount of money but couldn’t afford to in- crease the amount of liabilities on the balance sheet for fear of the stock price dropping and banks becoming nervous and demanding repayment of existing loans. David discovered a way that would allow the company to raise the needed cash to continue operations without having to report the long-term notes payable on the balance sheet. Under an obscure rule, companies can set up separate legal organizations that do not have to be reported on the parent company’s financial statements, if a third party contributes just 3 percent of the start-up capital. David called a friend, Brian Johnson, and asked him to participate in a business venture with Global. Brian agreed, and created a special purpose entity with Global named BrianCo. For his par- ticipation, Brian was awarded a substantial amount of valuable Global stock. Brian then went to a bank and used the stock as collateral to borrow a large sum of money for BrianCo. Then, Global sold some of its poor or underperforming assets to BrianCo for the cash that Brian borrowed. In the end, Global got rid of bad assets, received the proceeds of the long-term note payable, and did not have to show the liability on the balance sheet. Only the top executives and the accountants that worked closely with David knew of the scheme, and they planned to use this method only until the e-commerce portion of Global became profitable again.

 (Edmonds 303)

Edmonds, Thomas. Survey of Accounting, 2nd Edition, 2nd Edition. McGraw-Hill Primis Custom Publishing. <vbk:0390124117#page(303)>.

2# Corporations and Partnerships

"ATC 8-6               Comparison of organizational forms

Jim Baku and Scott Hanson are thinking about opening a new restaurant. Baku has extensive marketing experience but does not know that much about food preparation. However, Hanson is an excellent chef. Both will work in the business, but Baku will provide most of the funds necessary to start the business. At this time, they cannot decide whether to operate the business as a partnership or a corporation.

Required

Prepare a written memo to Baku and Hanson describing the advantages and disadvantages of each organizational form. Also, from the limited information provided, recommend the or- ganizational form you think they should use"

 (Edmonds 337)

Edmonds, Thomas. Survey of Accounting, 2nd Edition, 2nd Edition. McGraw-Hill Primis Custom Publishing. <vbk:0390124117#page(337)>.