The Purpose of this activity is to get a better understanding of (1) the concept of Earnings Management and (2) the accounting for debt financing. A- Solve Problem 2-14 here under: Emerson Electric is engaged in design, manufacture, and sale of a broad range of electrical, electromechanical, and electronic products and systems. The following shows Emerson's net income and net income before extraordinary items for the past 20 years (in millions): Emerson Electric PROBLEM 2-14 Earnings Management Strategies Net Income Net Income Net Income before Net Extraordinary Net before Extraordinary before Net Extraordinary Year Income Items Year Income Items Year Income Items Y1 $201.0 $201.0 Y8 $408.9 $408.9 Y15 $708.1 $ 708.1 Y2 237.7 237.7 Y9 467.2 467.2 Y16 788.5 904.4 Y3 273.3 273.3 Y10 528.8 528.8 Y17 907.7 929.0 Y4 300.1 300.1 Y11 588.0 588.0 Y18 1,018.5 1,018.5 Y5 302.9 302.9 Y12 613.2 613.2 Y19 1,121.9 1,121.9 Y6 349.2 349.2 Y13 631.9 631.9 Y20 1,228.6 1,228.6 Y7 401.1 401.1 Y14 662.9 662.9 Emerson has achieved consistent earnings growth for more than 160 straight quarters (more than 40 years). CHECK Income smoothing strategy Required: a. What earnings strategy do you think Emerson has applied over the years to maintain its record of earnings growth? b. Describe the extent you believe Emerson's earnings record reflects business activities, excellent management, and/or earnings management. c. Describe how Emerson's earnings strategy is applied in good years and bad. d. Identify years where Emerson likely built hidden reserves and the years it probably drew upon hidden reserves. B- Solve Problem 3-4 here under. For parts (b) and (c), use a tabular format. PROBLEM 3-4. Bond Accounting CHECK (a) $55.36 million Cybernetics Inc. issued $60 million of 5% three-year bonds, with coupon paid at the end of every year. The effective interest rate at the beginning of Years 1, 2, and 3 was 8%, 5%, and 2%. Required: a. Determine what Cybernetics would have raised from the bond issue. b. Assume Cybernetics decides to account for the bonds using the amortized cost method. Determine the interest and bond amortization for each of the three years. c. Assume Cybernetics decides to account for the bonds using the fair value method. Determine the interest, un- realized gain/loss, and total expense for each of the three years. d. Explain why the amounts charged to income every year differ under the two methods.