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Carter Corporation
Author(s):
Anthony, Robert N.
Functional Area(s):
   Financial Accounting
Setting(s):
   For Profit
Difficulty Level: Advanced
Pages: 3
Teaching Note: Available. 
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First Page and the Assignment Questions:

Early in 2001, Carter Corporation acquired Diroff Corporation. Diroff continued to operate as a Carter subsidiary. At the end of 2001, the president of Carter asked the company’s public accounting firm to prepare consolidated financial statements. Data from the separate financial statements of the two corporations are given in Exhibit 1. (For the purpose of this case, these data have been condensed and rounded.)

The following additional information was provided:

  1. During 2001 Diroff delivered and billed to Carter goods amounting to $34,000. Diroff’s costs for these goods was $25,500. Carter had paid Diroff invoices billed through November 30 that totaled $28,900. All of the Diroff goods were sold to outside customers in 2001.
  2. Late in December 2001, Carter took a loan from Diroff for $32,300 cash. The loan was evidently a five year note. (No interest on this loan was recorded in the accounts of either company because the transaction occurred so near the end of the year.)

The accountant proceeded to prepare consolidated financial statements. In discussing them with the president, however, the accountant discovered that he had made two assumptions:

  1. He had assumed that Carter had acquired 100 percent of Diroff’s stock, whereas in fact Carter had acquired only 75 percent.
  2. He had assumed that Diroff’s dividend was included in Carter’s $37,400 of other income, whereas in fact Carter had not received the dividend in 2001 and had made no entry to record the fact that the dividend had been declared and was owed to Carter as of December 31, 2001.

The accountant thereupon prepared revised consolidated statements.

After these revised statements had been mailed, the accountant received a telephone call from Carter’s president:

Sorry, but I was wrong about our sales of Diroff merchandise. Carter’s sales were indeed $1,040,400 but only $20,400 was from sales of Diroff products. We discovered that $13,600 of Diroff products were in Carter’s inventory as of December 31, 2001. Don’t bother to prepare new statements, however. Tell me the changes, and I’ll make them on the statements you sent me.

Assignment

  1. Reconstruct the consolidated financial statements that the accountant originally prepared.
  2. Prepare revised consolidated financial statements based on the information that the accountant learned in his first conversation with the president.
  3. What changes should be made in the financial statements as a result of the president’s telephone conversation?
  4. Contrast the financial performance and status of the company as reported in the original consolidated statements and as finally revised.