Reference no: EM13484367

Soon after beginning the year-end audit work on March 10 at Engone Company, the auditor has the following conversation with the controller.
Controller: The year ended March 31st should be our most profitable in history and, as a consequence, the board of directors has just awarded the officers generous bonuses.

Auditor: I thought profits were down this year in the industry, according to your latest interim report.
Controller: Well, they were down, but 10 days ago we closed a deal that will give us a substantial in- crease for the year.

Auditor: Oh, what was it?
Controller: Well, you remember a few years ago our former president bought stock in Henderson En- terprises because he had those grandiose ideas about becoming a conglomerate. For 6 years we have not been able to sell this stock, which cost us $3,000,000 and has not paid a nickel in dividends. Thursday we sold this stock to Bimini Inc. for $4,000,000. So, we will have a gain of $700,000 ($1,000,000 pretax) which will increase our net income for the year to $4,000,000, compared with last year's $3,800,000. As far as I know, we'll be the only com- pany in the industry to register an increase in net income this year. That should help the market value of the stock!

Auditor: Do you expect to receive the $4,000,000 in cash by March 31st, your fiscal year-end?
Controller: No. Although Bimini Inc. is an excellent company, they are a little tight for cash because of their rapid growth. Consequently, they are going to give us a $4,000,000 zero-interest- bearing note with payments of $400,000 per year for the next 10 years. The first payment is due on March 31 of next year.

Auditor: Why is the note zero-interest-bearing?
Controller: Because that's what everybody agreed to. Since we don't have any interest-bearing debt, the funds invested in the note do not cost us anything and besides, we were not getting any dividends on the Henderson Enterprises stock.