Able Corporation decided to make a public offering of bonds to raise needed capital. It publicly sold $2,500,000 of 8% debentures in accordance with the registration requirements of the Securities Act of 1933. The financial statements filed with the registration statement contained the unqualified opinion of Baker & Baker, CPAs. The financial statements overstated Able’s net income and net worth. Through negligence, Baker & Baker did not detect the overstatements. As a result, the bonds, which originally sold for $1,000 per bond, have dropped in value to $700. Ira is an investor who purchased $10,000 of the bonds. He promptly brought an action against Baker & Baker under the Securities Act of 1933.
Answer the following, providing reasons for your conclusions:
a. Will Ira likely prevail on his claim under the Securities Act of 1933?
b. Identify the primary issues that will determine the likelihood of Ira’s prevailing on the claim.
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Auditing: A Risk Based-Approach (MindTap Course List)
- In 1983, to obtain financing prior to a public offering, Osborne Corporation sold warrants entitling investors to buy Osborne shares at a favorable price. The investors were given and relied on an unqualified audit opinion regarding Osborne’s 1982 financial statements, which indicated that Osborne had a net operating profit of $69,000 on sales of $68 million. The audit opinion, issued by Arthur Young & Company, stated that the audit had been completed in compliance with GAAS, that the financial statements had been prepared in compliance with FGAPP, and that the financial statements fairly presented Osborne’s financial position. Arthur Young could foresee that the audited financial statements might be used by buyers of Osborne’s warrants, but Arthur Young did not know that buyers of warrants would in fact use the financial statements. The buyers of the warrants lost their investments when Osborne’s manufacturing problems and IBM’s dominance in the PC market forced Osborne into…arrow_forwardQ1. Mays bought McCovey Corp. common stock in an offering registered under the Securities Act of 1933. Hart & Co., CPAs, gave an unqualified opinion on McCovey's financial statements that were included in the registration statement filed with the Securities and Exchange Commission. Mays sued Hart under the provisions of the 1933 act that deal with omission of facts required to be in the registration statement. Mays must prove that: (in your response, identify the burdens of proof for the plaintiff under the Securities Act of 1933). Q2. While conducting an audit, Larson Associates, CPAs, failed to detect material misstatements included in its client's financial statements. Larson's unqualified opinion was included with the financial statements in a registration statement and prospectus for a public offering of securities made by the client. Larson knew that its opinion and the financial statements would be used for this purpose. Which of the following statements is correct with…arrow_forwardLiability under the Securities Acts. Orange is a public entity whose shares are traded ona national exchange. A Public Company Accounting Oversight Board inspection revealed adeficiency in audits conducted by Orange’s auditor, LeGrow. LeGrow had failed to performimportant auditing procedures; after performing these procedures in response to the inspection, LeGrow identified several material misstatements and requested that Orange restateits financial statements. These restatements had the effect of reducing Orange’s reportedincome and cash flow from operations and increasing its liabilities.Upon the disclosure of these restatements, Orange’s stock price declined more than 40percent. Angered over this decline, investors are contemplating bringing legal action againstLeGrow for failing to detect the misstatements.Required:a. Assume that investors are bringing suit under the Securities Act of 1933. What wouldinvestors need to demonstrate to bring suit against LeGrow under this act?b. What…arrow_forward
- LED Corporation owns $1,000,000 of Branch Pharmaceuticals bonds and classifies its investment as securities held to maturity. The market price of Branch’s bonds fell by $450,000, due to concerns about one of the company’s principal drugs. The concerns were justified when the FDA banned the drug. LED views $200,000 of the $450,000 loss as related to credit losses, and the other $250,000 as noncredit losses. LED thinks it is more likely than not that it will have to sell the investment before fair value recovers. What journal entries should LED record to account for any credit or noncredit losses in the current period? How should the decline affect net income and comprehensive income?arrow_forwardLED Corporation owns $1,000,000 of Branch Pharmaceuticals bonds and classifies its investment as securities held-to-maturity. The market price of Branch’s bonds fell by $450,000 due to concerns about one of the company’s principal drugs. The concerns were justified when the FDA banned the drug. LED views $200,000 of the $450,000 loss as related to credit losses, and the other $250,000 as noncredit losses. LED thinks it is more likely than not that it will have to sell the investment before fair value recovers. What journal entries should LED record to account for any credit or noncredit losses in the current period? How should the decline affect net income and comprehensive income? General Journal What journal entries should LED record to account for any credit or noncredit losses in the current period? Note: If no entry is required for a transaction/event, select "No journal entry required" in the first account field. No Transaction General Journal Debit…arrow_forwardWhen a certificate of stock is issued for shares whose subscription is not fully paid, then – a) the certificates are deemed null and void for being in violation of express prohibition of the Corporation Code. b) the directors and officers who allowed such issuance of the certificate shall be liable to the corporation for the balance of the subscription that remains unpaid. c) the shares are conclusively deemed fully paid as to every due holder in good faith of the certificate of stock. d) the registered stockholder shall no longer be liable for the unpaid portion of the subscription.arrow_forward
- LED Corporation owns $1,000,000 of Branch Pharmaceuticals bonds and classifies its investment as securitiesavailable-for-sale. The market price of Branch’s bonds fell by $450,000, due to concerns about one of the company’sprincipal drugs. The concerns were justified when the FDA banned the drug. $100,000 of that decline in value alreadyhad been included in OCI as a temporary unrealized loss in a prior period. LED views $200,000 of the $450,000 lossas related to credit losses, and the other $250,000 as noncredit losses. LED thinks it is more likely than not that itwill have to sell the investment before fair value recovers. What journal entries should LED record to account for thedecline in market value in the current period? How should the decline affect net income and comprehensive income?arrow_forwardNixon & Co., CPAs, issued an unmodified opinion on the 2015 financial statements of Madison Corp. These financial statements were included in Madison’s annual report and Form 10-K filed with the SEC. Nixon did not detect material misstatements in the financial statements as a result of negligence in the performance of the audit. Based upon the financial statements, Harry Corp. purchased stock in Madison. Shortly thereafter, Madison became insolvent, causing the price of the stock to decline drastically. Harry has commenced legal action against Nixon for damages based upon Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. What would be Nixon’s best defense to such an action? Explain.arrow_forwardUnknown to the other four proponents, Enrico (who had been given the task of attending to the Articles of Incorporation of the proposed corporation, Auto Mo,AyosKo) misappropriated the filing fees and never filed the Articles of Incorporation with the Securities and ExchangeCommission (SEC). Instead, he prepared and presented to the proposed incorporators a falsified SEC certificate approving the Articles. Relying on the falsified SEC certificate, the latter began assuming and discharging corporate powers. . Auto Mo, Ayos Ko is a __________. a. de jure corporation b. de facto corporation c. corporation by estoppel d. general partnershiparrow_forward
- 2. On January 1, 20x1, an entity purchased marketable equity securities for P2,500,000. The entity paid commission and taxes of P190,000. The equity securities do not qualify as financial asset held for trading. The entity made irrevocable election to present unrealized gain and loss in other comprehensive income. The securities have a market value of P2,600,000, and P2,750,000 on December 31, 20x1 and December 31, 20x2. O n July 1, 2022, half of the securities are sold for P1,400,000. On December 31, 20x2, how much shall be shown in the statement of comprehensive income as unrealized gain/ loss? (sample answer: 10,500 UG or 10,500 UL)arrow_forwardLED Corporation owns $1,000,000 of Branch Pharmaceuticals bonds and classifies its investment as securities available-for-sale. The market price of LED’s investment in Branch’s bonds fell by $450,000, due to concerns about one of the company’s principal drugs. The concerns were justified when the FDA banned the drug. $100,000 of that decline in value already had been included in OCI as a temporary unrealized loss in a prior period. LED views $200,000 of the $450,000 loss as related to credit losses, and the other $250,000 as noncredit losses. LED thinks it is more likely than not that it will have to sell the investment before fair value recovers. What journal entries should LED record to account for the decline in market value in the current period? How should the decline affect net income and comprehensive income?arrow_forwardDirks was an officer of a New York broker-dealer firm that specialized in providing investment analysis of insurance company securities to institutional investors. On March 6, Dirks received information from Ronald Secrist, a former officer of Equity Funding of America. Secrist alleged that the assets of Equity Funding, a diversified corporation primarily engaged in selling life insurance and mutual funds, were vastly overstated as the result of fraudulent corporate practices. Dirks decided to investigate the allegations. He visited Equity Funding’s headquarters in Los Angeles and interviewed several officers and employees of the corporation. The senior management denied any wrongdoing, but certain corporation employees corroborated the charges of fraud. Neither Dirks nor his firm owned or traded any Equity Funding stock, but throughout his investigation he openly discussed the information he had obtained with a number of clients and investors. Some of these persons sold their holdings…arrow_forward
- Auditing: A Risk Based-Approach (MindTap Course L...AccountingISBN:9781337619455Author:Karla M Johnstone, Audrey A. Gramling, Larry E. RittenbergPublisher:Cengage LearningBusiness/Professional Ethics Directors/Executives...AccountingISBN:9781337485913Author:BROOKSPublisher:Cengage