How should Joan Smith reply to the controller’s questions? Note: your answer could be different than either of the alternatives suggested by the XYZ controller.
Facts:
Joan Smith, CPA, receives a telephone call from her client, XYZ Company. The company’s controller states that the board of directors of XYZ has entered into two contractual arrangements with Steve Green, the company’s former president, who has recently retired. Under one agreement, XYZ Company will pay the ex-president $7,000 per month for five years if he does not compete with the company during that time in a rival business. Under the other agreement, the company will pay the ex-president $5,000 per month for five years for such advisory services as the company may request from the ex-president.
XYZ’s controller asks Smith whether the balance sheet as of the date the two agreements were signed should show $144,000 in current liabilities and $576,000 in long-term liabilities, or whether the two agreements should only be disclosed in a contingency note to the financial statements (i.e. no amounts should be accrued in the financial statements pursuant to these two agreements).
Required:
- How should Joan Smith reply to the controller’s questions? Note: your answer could be different than either of the alternatives suggested by the XYZ controller.
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