Case .10

The board of directors of Purdido Corporation have just directed Purdido’s officers to abandon further efforts to complete an acquisition of all the outstanding common stock of Sontee Company in a business combination that would have resulted in a parent company–subsidiary relationship between Purdido and Sontee. After learning of the board’s decision, Purdido’s chief financial officer instructed the controller, a CPA who is a member of the AICPA, the FEI, and the IMA (see Chapter 1), to analyze the out-of-pocket costs of the abandoned proposed combination. After some analysis of Purdido’s accounting records, the controller provided the following summary to the CFO:

PURDIDO CORPORATIONOut-of-Pocket Costs of Abandoned Business Combination April 17, 2005 Legal fees relating to proposed business combination ………………………………$120,000

Finder’s fee relating to proposed business combination …………………………………….0

*Costs associated with proposed SEC registration statement for Purdido common stock to have been issued in the business combination…………... 180,000

Total out-of-pocket costs of abandoned business combination……………………... $300,000

*Finder’s fee was contingent on successful completion of the business combination.

Noting that recognition of the entire $300,000 as expense on April 17, 2005, would have a depressing effect on earnings of Purdido for the quarter ending June 30, 2005, the CFO instructed the controller to expense only $120,000 and to debit the $180,000 amount to the Paid-in Capital in Excess of Par ledger account. In response to the controller’s request for justification of such a debit, the CFO confided that Purdido’s board was presently engaged in exploring other business combination opportunities, and that the costs incurred on the proposed SEC registration statement thus had future benefits to Purdido.

Instructions

May the controller of Purdido Corporation ethically comply with the CFO’s instructions? Explain.