Problem:

Lee Adsitt and Alex Wiren were best friends at a small undergraduate college and they fought side by side in the jungles of Vietnam. On returning to the United States, they went their separate ways to pursue MBA degrees, Lee to a prestigious East Coast business school and Alex to an equally prestigious West Coast school. However, 40 years later, their paths crossed again.

By 2003, Alex had become president and CEO of Hayden Electronics after 15 years with the firm. Lee had started working for American Airlines, but had left after 9 years to start his own firm, Adsitt Transport. In April 2008, Adsitt Transport was near bankruptcy when Lee approached his old friend for help. Alex Wiren answered his friend's call, and Hayden Electronics bought 19% of the stock of Adsitt Transport.

In 2013, Adsitt was financially stable and Hayden was struggling. In fact, Alex Wiren thought his job as CEO might be in jeopardy if Hayden did not report income up to expectations. Late in 2013, Alex approached Lee with a request quadruple Adsitt's dividends so Hayden could recognize $760,000 of investment income. Hayden had listed its investment in Adsitt as an available-for-sale security. Although Adsitt had never paid dividends of more than 25% of net income, and it had plenty of use for excess cash, Lee felt a deep obligation to Alex. Thus, he agreed to a $4 million dividend on net income of $4.5 million

Requirement 1: Why does the dividend policy of Adsitt Transport affect the income of Hayden Electronics? Because Hayden Electronics accounts for its 19% investment in Adsitt Transport using the method, and because the securities are V. changes in the market value of Adsitt are 0. They induded in the income statement. The amount of dividends peld by Adsitt part of the Income of Hayden Electronics. By increasing the Adsitt dividends, Hayden win its net income. Is this consistent with the intent of the accounting principles relating to the market and equity methods for intercorporate investments? Explain. The ability of Hayden to its income by influencing the dividend policy of Adsit V seem consistent with the market method of accounting. Policy makers generally vier holdings below 20% as to allow the owner significant influence over the affiliated company. However, in this instance V Hayden's ownership interest is only 19%. Requirement 2: Comment on the ethical issues in the arrangements between Lee Adsitt and Alex Wiren. (Select all answers that may apply.) OA. The influence of Wiren on Adsitt's dividend policy does not create an ethical issue. This manipulation of Adsitt's policy does not violate the intent of the accounting principles. If Adsitt pays out $4 million in dividends and then borrows to meet its capital needs, future profitability of Adsitt will be unaffected. OB. The investment by Hayden in Adsitt creates an ethical issue. It Alex Wiren made his decision based only on his friendship with Adeitt, and it it was not in the best interests of the shareholders of Hayden, Wiren was not appropriately carrying out his duties as an officer of Hayden. Presently this may not be of much concern because the investment appears to have turned out to be profitable to the Hayden shareholders. Nevertheless, if the decision had been based on personal benefits rather than corporate benefits, it was not appropriate. Oc. The investment by Hayden in Adsitt does not create an ethical issue. If Alex Wiren made his decision based on his friendship with Adsitt, even if it was not in the best interests of the shareholders of Hayden, Wiren was within his rights carrying out his duties 85 an officer of Hayden. The investment appears to have turned out to be profitable to the Hayden shareholders therefore, it was not appropriate, OD. The influence of Wiren on Adsitt's dividend policy creates an ethical issue. Not only does this manipulation of Acts it's policy violate the intent of the accounting principles, it may not be in the best interests of Adsitt's other shareholders. It Adsitt pays out $1 million in dividends and then borrows to meet its capital needs, future profitability of Adsitt may be eliminished. The personal obligation of Adsitt to Wiren should not influence the corporate decisions. Requirement 1: Why does the dividend policy of Adsitt Transport affect the income of Hayden Electronics? Because Hayden Electronics accounts for its 19% investment in Adsitt Transport using the method, and because the securities are V. changes in the market value of Adsitt are 0. They induded in the income statement. The amount of dividends peld by Adsitt part of the Income of Hayden Electronics. By increasing the Adsitt dividends, Hayden win its net income. Is this consistent with the intent of the accounting principles relating to the market and equity methods for intercorporate investments? Explain. The ability of Hayden to its income by influencing the dividend policy of Adsit V seem consistent with the market method of accounting. Policy makers generally vier holdings below 20% as to allow the owner significant influence over the affiliated company. However, in this instance V Hayden's ownership interest is only 19%. Requirement 2: Comment on the ethical issues in the arrangements between Lee Adsitt and Alex Wiren. (Select all answers that may apply.) OA. The influence of Wiren on Adsitt's dividend policy does not create an ethical issue. This manipulation of Adsitt's policy does not violate the intent of the accounting principles. If Adsitt pays out $4 million in dividends and then borrows to meet its capital needs, future profitability of Adsitt will be unaffected. OB. The investment by Hayden in Adsitt creates an ethical issue. It Alex Wiren made his decision based only on his friendship with Adeitt, and it it was not in the best interests of the shareholders of Hayden, Wiren was not appropriately carrying out his duties as an officer of Hayden. Presently this may not be of much concern because the investment appears to have turned out to be profitable to the Hayden shareholders. Nevertheless, if the decision had been based on personal benefits rather than corporate benefits, it was not appropriate. Oc. The investment by Hayden in Adsitt does not create an ethical issue. If Alex Wiren made his decision based on his friendship with Adsitt, even if it was not in the best interests of the shareholders of Hayden, Wiren was within his rights carrying out his duties 85 an officer of Hayden. The investment appears to have turned out to be profitable to the Hayden shareholders therefore, it was not appropriate, OD. The influence of Wiren on Adsitt's dividend policy creates an ethical issue. Not only does this manipulation of Acts it's policy violate the intent of the accounting principles, it may not be in the best interests of Adsitt's other shareholders. It Adsitt pays out $1 million in dividends and then borrows to meet its capital needs, future profitability of Adsitt may be eliminished. The personal obligation of Adsitt to Wiren should not influence the corporate decisions