Hardy Products/Gulwest

Individual Written Assignment #7 (25 pts)

1. Should the investment in Hardy Products Corporation be accounted for using the equity method? Please support your answer using appropriate references from the authoritative literature. Speculate as to why Hardy would want to continue using the cost method?

If the investor obtains common stock with the ability to exercise significant influence over an investee, the disclosure for investments in common stock should use equity method (FASB). Under ASC 323-10-50-3, financial statements should disclose the name of each investee and percentage of ownership of common stock, the accounting policies in the investor, and the book to carrying value difference. Unless the equity is considered held-to-maturity, in which case the equity could be carried at cost, the value is reported at market value. HHD never explicitly states their positive intent or ability to hold these securities to maturity; therefore the investment is classified as available for sale and carried at market value (320-10-25-1).

The cost method is not only easier, but can do less damage to HHD’s financials. Any change in market value for trading or available for sale securities carries over to the income statement or accumulated other comprehensive income, while held to maturity investment securities are carried at cost therefore no unrealized gain or loss is reported (FASB).

2. How do you discover related party transactions? How do you audit related party transactions? How do you know the prices Hardy is getting/charging is fair? Why does this matter from an audit perspective? Using Lexis/Nexis, provide an example of a related party footnote disclose. (Note: Please make sure you are including a valid related party footnote and not just a footnote that contains the term “related party”)

No assurance is provided that all related party transactions will be discovered, but AU 334 provides audit procedures normally performed in an audit and...