Case Studies 8-13

ACG 6135 – Accounting Theory (Spring 2026)

Group Case Assignments – Part 2

Due Date – April 28, 2026, by 11.59 pm. Only one person per group needs to submit all the

cases to Canvas.

Instructions

• Complete all of the five (5) cases listed below.

• Submit your responses in paragraph form, fully addressing the questions in each case.

Avoid bulleted lists.

• Each case response should be 3–4 pages in length.

• Formatting requirements: Times New Roman, 12-point font; 1.15 line spacing; 1-inch

margins.

• Include 3–4 scholarly references per case, formatted in APA style.

• Do your research thoroughly. You are NOT allowed to use AI to complete these cases.

• Refer to the rubric for each case on how you will be graded.

The cases are starting on the next page.

Chapter 8 Case: Working Capital and FASB ASC 210-10-45

VitalTech Pharmaceuticals, a rapidly growing biotechnology company, is preparing its annual

financial statements for the fiscal year ended December 31, 2024. The company recently

completed its initial public offering (IPO) and is under increased scrutiny from investors,

analysts, and regulators. The CFO, Dr. Amelia Chen, is particularly concerned with the

presentation of current assets and current liabilities in accordance with FASB ASC 210-10-45, as

the company's working capital position has significant implications for investor confidence and

compliance with debt covenants.

Key Financial Details:

1. Working Capital Components:

o Cash and cash equivalents: $12 million

o Short-term investments: $15 million

o Accounts receivable: $28 million

o Inventory: $35 million

o Prepaid expenses: $5 million

o Accounts payable: $22 million

o Short-term debt: $18 million

o Current portion of long-term debt: $10 million

o Accrued expenses: $14 million

o Deferred revenue: $8 million

2. Special Circumstances:

o The company has a $20 million line of credit that expires in 15 months but

contains a subjective acceleration clause allowing the bank to demand repayment

at any time if it determines that a material adverse change has occurred.

Currently, $7 million is drawn on this line.

o VitalTech has $9 million in restricted cash designated for a specific research

project as required by a government grant.

o Trade receivables of $5 million have been pledged as collateral for a short-term

loan.

o The company's inventory includes $8 million of raw materials expected to be used

in production beyond 12 months.

o There is a $4 million advance payment from a customer for a long-term supply

contract spanning three years, which has been included in deferred revenue.

3. Debt Covenant Requirements:

o VitalTech's loan agreements require maintaining a current ratio of at least 1.5:1.

o The company must maintain minimum working capital of $30 million.

As a consultant specializing in financial reporting, you have been engaged to assist Dr. Chen

with the following tasks:

1. Classification Analysis: Determine the proper classification of the above items under

FASB ASC 210-10-45, with particular attention to restricted cash, the line of credit with

a subjective acceleration clause, pledged receivables, long-term inventory, and the

advance payment.

2. Working Capital Calculation: Calculate VitalTech's working capital and current ratio

based on your analysis, and assess compliance with debt covenants.

3. Disclosure Requirements: Recommend appropriate financial statement disclosures

related to working capital components, restrictions, and debt covenant compliance.

4. Strategic Recommendations: Provide recommendations for improving VitalTech's

working capital position and financial statement presentation to enhance transparency and

investor confidence.

Grading Rubric (Out of 20 Points)

Criteria Points Description

Understanding of ASC

210-10-45 5

Demonstrates comprehensive understanding of current asset

and liability classification principles under FASB ASC 210-

10-45.

Classification Analysis 5 Accurately analyzes and justifies the classification of each

component, particularly the special circumstances items.

Calculation and Covenant

Assessment 4

Correctly calculates working capital and current ratio, with

proper analysis of covenant compliance.

Disclosure

Recommendations 3

Provides appropriate and comprehensive disclosure

recommendations for the financial statements.

Strategic

Recommendations 3

Offers practical, well-reasoned strategies for improving

working capital management and presentation.

Chapter 9 Case: Depreciation Methods and Disclosures

SkyHigh Manufacturing Inc., a large industrial equipment manufacturer, is reviewing its

depreciation policies as part of a broader financial reporting overhaul. The company's newly

appointed Controller, Jamie Wong, has raised concerns about inconsistencies in the company's

application of depreciation methods across different asset classes and operating divisions. Wong

believes these inconsistencies may be affecting the comparability of financial results both

internally and against industry peers. The Board of Directors has requested a comprehensive

analysis of the company's current depreciation practices, including potential financial statement

impacts of alternative approaches.

Key Details:

1. Current Asset Portfolio and Depreciation Methods:

o Manufacturing equipment ($85 million cost, 10-year useful life): Double-

declining balance

o Factory buildings ($120 million cost, 30-year useful life): Straight-line

o Vehicles and transportation equipment ($15 million cost, 5-year useful life):

Units-of-production

o Office furniture and fixtures ($8 million cost, 7-year useful life): Straight-line

o Computer equipment and software ($12 million cost, 3-year useful life): Sum-of-

the-years'-digits

2. Recent Acquisitions and Changes:

o SkyHigh acquired a competing manufacturer last year, which uses straight-line

depreciation for all fixed assets.

o The company recently invested $40 million in advanced robotics technology with

an expected useful life of 8 years. Management has not yet determined which

depreciation method to apply.

o Industry trends suggest the economic life of manufacturing equipment may be

shorter than previously estimated due to rapid technological advancements.

o The company operates in multiple jurisdictions with different tax depreciation

requirements.

3. Financial Reporting Considerations:

o SkyHigh's current ratio of depreciation expense to revenue is 8%, while the

industry average is 6%.

o Management bonus plans are partially tied to EBITDA targets.

o The company is planning an international expansion and will need to consider

IFRS implications for depreciation policies.

o Current disclosures about depreciation methods are limited to a single paragraph

in the financial statement notes.

o The company's existing ERP system has limitations in tracking multiple

depreciation methods.

As a consultant specializing in financial reporting and accounting policies, you have been

engaged to evaluate SkyHigh's depreciation practices and prepare a comprehensive report

addressing the following:

1. Method Analysis: Evaluate the theoretical justifications, advantages, and disadvantages

of straight-line, accelerated (double-declining balance and sum-of-the-years'-digits), and

units-of-production depreciation methods. Assess which methods are most appropriate

for each major asset class at SkyHigh based on the pattern of economic benefits

consumption.

2. Quantitative Impact: Calculate and present the financial statement impact of using

different depreciation methods for the newly acquired robotics technology over its 8-year

useful life, assuming a $40 million cost and $4 million salvage value. Present a

comparative analysis showing how each method would affect net income, asset carrying

values, and key financial ratios in years 1, 4, and 8.

3. Disclosure Evaluation: Assess the adequacy of SkyHigh's current depreciation

disclosures against requirements under U.S. GAAP (ASC 360) and best practices.

Recommend comprehensive disclosure improvements that would enhance transparency

and usefulness for financial statement users.

4. Policy Recommendations: Develop a cohesive depreciation policy framework for

SkyHigh that balances theoretical soundness, operational practicality, financial statement

impact, and industry comparability. Address considerations for the newly acquired

subsidiary and international operations.

Grading Rubric (Out of 20 Points)

Criteria Points Description

Theoretical Analysis 5

Comprehensive analysis of depreciation methods with clear

explanation of matching principle, asset consumption patterns,

and theoretical justifications for each method.

Quantitative

Calculations 5

Accurate calculations demonstrating financial impacts of

different depreciation methods, with clear presentation of

comparative effects on statements and key metrics.

Disclosure Analysis 4 Thorough evaluation of disclosure requirements under GAAP

with specific, detailed recommendations for improvements.

Policy

Recommendations 4

Well-reasoned, practical recommendations for a cohesive

depreciation framework that addresses all relevant

considerations.

Overall Quality and

Integration 2

Well-structured analysis with logical flow, professional

presentation, and integration of accounting theory with practical

business considerations.

Chapter 10 Case: Long-term Assets - Accounting for Investments

Horizon Ventures Inc., a medium-sized investment company, holds various ownership interests

in different companies. As the company prepares its year-end financial statements for 2024, the

CFO, Miranda Chen, needs guidance on the appropriate accounting methods for these

investments based on their ownership percentages and level of influence or control.

Investment Portfolio Details:

1. SolarPath Energy (Solar panel manufacturer)

o Acquisition: 8% ownership acquired on January 1, 2024, for $5 million

o Fair value as of December 31, 2024: $6 million

o SolarPath reported net income of $4 million for 2024 and paid dividends of $1

million

o Horizon has no board representation and no involvement in SolarPath's operations

2. OceanTech Systems (Marine research technology)

o Acquisition: 25% ownership acquired on January 1, 2024, for $15 million

o Fair value as of December 31, 2024: $14 million

o OceanTech reported net income of $3 million for 2024 and paid dividends of $0.5

million

o Horizon has one representative on OceanTech's board of directors

o Horizon participates in OceanTech's policy-making processes

3. TechFuture Robotics (Automation systems)

o Acquisition: 65% ownership acquired on January 1, 2024, for $40 million

o Fair value as of December 31, 2024: $45 million

o TechFuture reported net income of $6 million for 2024 and paid dividends of $1.5

million

o Horizon has full management control

o TechFuture's identifiable net assets were valued at $50 million on acquisition date

o Goodwill has not been impaired

Additional Information:

• Horizon's policy is to apply the appropriate accounting method based on ownership

percentage and level of influence or control

• The company has not elected the fair value option for any investments eligible for equity

method accounting

• All investments are intended to be held for long-term strategic purposes

• No complex arrangements affect Horizon's level of influence or control

As a financial reporting consultant, you have been asked to assist with the following:

1. Classification Analysis: For each investment, determine the appropriate accounting

method (fair value method, equity method, or consolidation) under GAAP. Explain your

reasoning based on ownership percentage and indicators of significant influence or

control.

2. Accounting Calculations: Calculate the carrying value of each investment as of

December 31, 2024, using the appropriate accounting method. Prepare the necessary

journal entries for 2024.

3. Financial Statement Presentation: Describe how each investment should be presented

on the balance sheet and income statement, and outline the key disclosures required for

each type of investment under the applicable accounting standards.

4. Recommendations: Provide recommendations to help Horizon develop a clear policy

framework for determining the appropriate accounting treatment across its range of

investments (from minor interests to controlling stakes).

Grading Rubric (Out of 20 Points)

Criteria Points Description

Classification Analysis 5 Clear explanation of which accounting method is appropriate for

each investment with proper justification.

Calculation Accuracy 5 Accurate calculation of year-end carrying values with proper

journal entries for each investment.

Presentation and

Disclosure 5

Correct description of financial statement presentation and

required disclosures for each type of investment.

Policy

Recommendations 3

Practical guidance for determining the appropriate accounting

method across the full range of investment types.

Overall Quality 2 Well-organized response with clear explanations and

professional presentation.

Chapter 11 Case: Long-term Debt - Classification and Off-Balance Sheet Financing

Coastal Manufacturing Inc., a mid-sized industrial equipment producer, is experiencing

significant growth and has engaged in various financing arrangements to fund its expansion. The

company's newly appointed Director of Finance, Marcus Johnson, is reviewing the company's

debt structure and financial reporting practices as part of the preparation for the annual financial

statements. Johnson has discovered several complex financing arrangements that raise questions

about proper classification of debt and potential off-balance sheet financing situations.

Financing Arrangements:

1. Term Loan from First National Bank

o Principal amount: $25 million

o Date obtained: January 1, 2023

o Term: 10 years with equal principal payments plus interest

o Interest rate: 5% fixed

o Covenants: Debt-to-EBITDA ratio must not exceed 3.5:1; current ratio must be at

least 1.2:1

o As of December 31, 2024, Coastal's ratios are: Debt-to-EBITDA 3.6:1; current

ratio 1.3:1

o The loan agreement gives the bank the right to demand immediate repayment if

covenants are breached

2. Equipment Leasing Arrangement

o Coastal entered a 7-year lease for specialized manufacturing equipment on July 1,

2024

o Annual lease payments: $2 million, paid at the beginning of each year

o First payment made on July 1, 2024

o Estimated useful life of equipment: 8 years

o No residual value guarantee

o Estimated fair value of equipment at lease inception: $12 million

o Coastal's incremental borrowing rate: 6%

o The lease does not transfer ownership at the end of the term

o Coastal has the option to purchase the equipment for $1 million at the end of the

lease term

3. Special Purpose Entity Arrangement

o In 2024, Coastal established Pioneer Logistics LLC, a separate legal entity

o Coastal owns 49% of Pioneer Logistics' voting shares

o The remaining 51% is owned by a group of passive investors

o Pioneer Logistics purchased a warehouse and distribution center for $15 million

o Financing: $3 million equity ($1.47 million from Coastal, $1.53 million from

other investors) and $12 million bank loan

o Coastal signed a 10-year agreement to be the exclusive user of the facility

o Annual payment from Coastal to Pioneer: $2.2 million

o Coastal guarantees 75% of Pioneer's bank loan

o Coastal has an option to purchase the facility after 5 years at fair market value

Additional Information:

• Coastal's fiscal year ends on December 31

• Total assets as of December 31, 2024: $120 million

• Prior to any adjustments, total liabilities: $70 million

• Shareholders' equity: $50 million

• The company follows U.S. GAAP for financial reporting

As a consultant specializing in financial reporting, you have been engaged to assist Marcus

Johnson with the following tasks:

1. Debt Classification Analysis: For the term loan, determine the proper balance sheet

classification (short-term vs. long-term debt) as of December 31, 2024. Provide a detailed

justification based on relevant accounting standards, particularly addressing the covenant

violation.

2. Lease Accounting Assessment: Evaluate whether the equipment lease should be

classified as an operating or finance lease, and demonstrate how it should be recognized

on Coastal's balance sheet under ASC 842. Calculate the amounts to be recognized and

provide the appropriate journal entries.

3. SPE Assessment: Evaluate whether Pioneer Logistics LLC should be consolidated or

treated as an off-balance sheet arrangement under current accounting standards. Justify

your conclusion based on control, variable interest entity considerations, and other

relevant factors.

4. Financial Statement Impact: Summarize the overall impact of your recommendations

on Coastal's debt-to-equity ratio and discuss the financial reporting implications of

properly accounting for these arrangements.

Grading Rubric (Out of 20 Points)

Criteria Points Description

Debt Classification

Analysis 5

Accurate determination of short-term vs. long-term classification

with comprehensive justification based on accounting standards.

Lease Accounting

Assessment 5

Proper evaluation of lease classification with correct calculation of

amounts to be recognized and appropriate journal entries.

SPE Assessment 5 Thorough analysis of SPE arrangement with well-reasoned

conclusion regarding consolidation or off-balance sheet treatment.

Financial Statement

Impact 3

Clear summary of overall impact on financial ratios and reporting

implications.

Overall Quality 2 Well-structured analysis with logical flow, professional

presentation, and proper application of accounting standards.

Chapter 13 Case: Accounting for Leases - Classifying Leases Under FASB ASC 840

Summit Logistics Corp., a regional distribution company, is expanding its operations and has

entered into several new lease agreements during the fiscal year ending December 31, 2024. The

company currently follows FASB ASC 840 for lease accounting. The CFO, Rebecca Martinez,

needs to determine the proper classification and accounting treatment for each lease before

finalizing the annual financial statements.

Lease Agreements:

1. Warehouse Facility Lease

o Commencement date: January 1, 2024

o Lease term: 8 years, non-cancelable

o Annual lease payments: $500,000, paid at the beginning of each year

o Estimated economic life of the warehouse: 40 years

o Fair value of the warehouse: $15 million

o The lease contains no renewal options or purchase options

o The lease includes a provision that transfers ownership to Summit at the end of

the lease term

o Summit's incremental borrowing rate: 6%

o Implicit rate in the lease: 5.5% (known to Summit)

2. Fleet of Delivery Trucks

o Commencement date: July 1, 2024

o Lease term: 5 years, non-cancelable

o Monthly lease payments: $25,000, paid at the beginning of each month

o Estimated economic life of the trucks: 7 years

o Fair value of the truck fleet: $1.4 million

o The lease contains a bargain purchase option of $100,000 at the end of the lease

term (estimated fair value at end of lease: $300,000)

o Summit's incremental borrowing rate: 6%

o Implicit rate in the lease: not determinable

3. Office Space Lease

o Commencement date: April 1, 2024

o Lease term: 4 years, non-cancelable

o Annual lease payments: $120,000 for year 1, increasing by 3% each year

thereafter, paid at the beginning of each year

o Estimated economic life of the building: 30 years

o Fair value of the office space: $3 million

o The lease contains an option to renew for an additional 2 years at $135,000 per

year

o Summit is reasonably certain to exercise the renewal option

o No bargain purchase option or ownership transfer

o The present value of all minimum lease payments (including renewal period) is

approximately 22% of the fair value of the office space

o Summit's incremental borrowing rate: 6%

o Implicit rate in the lease: not determinable

Additional Information:

• Summit Logistics Corp. is a privately-held company that prepares financial statements in

accordance with U.S. GAAP

• The company has not adopted the updated lease accounting standard (ASC 842) and

continues to apply ASC 840

• Total assets as of December 31, 2023: $25 million

• Annual revenues: approximately $20 million

• Summit does not have any existing capital leases on its books prior to 2024

As a newly hired accounting manager with expertise in lease accounting, you have been tasked

with the following:

1. Lease Classification: For each of the three lease agreements, determine whether it

should be classified as a capital lease or an operating lease under ASC 840. Provide a

detailed analysis of the four classification criteria and explain how each lease does or

does not meet these criteria.

2. Initial Recognition and Measurement: For any leases classified as capital leases,

calculate the initial lease asset and liability amounts that should be recognized on

Summit's balance sheet. Prepare the journal entries for the initial recognition and the first

lease payment.

3. Subsequent Accounting: For one of the capital leases (your choice), prepare a lease

amortization schedule for the first year showing the breakdown of lease payments

between principal and interest, and the reduction in the lease liability.

4. Financial Statement Impact: Compare and contrast the impact of capital versus

operating lease classification on Summit's financial statements and key financial ratios.

Specifically address the effects on:

o Balance sheet (assets, liabilities, and equity)

o Income statement (pattern of expense recognition)

o Financial ratios (debt-to-equity, return on assets, and interest coverage)

Grading Rubric (Out of 20 Points)

Criteria Points Description

Lease Classification

Analysis 6

Accurate application of ASC 840 classification criteria to each

lease with comprehensive justification for each determination.

Initial Recognition and

Measurement 5

Correct calculation of initial lease assets and liabilities with

proper journal entries for capital leases.

Subsequent Accounting 4 Accurate preparation of lease amortization schedule showing

principal and interest allocation.

Financial Statement

Impact Analysis 3

Thorough comparison of financial statement and ratio impacts

between capital and operating lease treatments.

Overall Quality and

Presentation 2

Well-organized analysis with clear explanations, professional

presentation, and proper application of accounting standards.