A North Dakota Telecommunication Company Sold "The Contractual Right to a 5-Year

question 12

Essay

A North Dakota telecommunication company sold "the contractual right to a 5-year supply of transmission capacity" to another telecommunication company in an all-cash transaction.The price was deliberately set above fair market value.The buyer,located in San Jose,California,in turn sold an equivalent amount of "5-year transmission capacity" to the North Dakota telecommunications company at an equally inflated price in an all-cash transaction.
a. Does this affect the North Dakota companies' net cash flow?
b. Does it affect the North Dakota company's reported assets?
c. Does it affect the North Dakota company's revenues in the year of sale?
d. Does it affect the North Dakota company's long-term profitability?
e. Why do you think that this company entered into this transaction?
f. Would you describe this transaction as a "round-trip" transaction? Why or why not?
g. How can auditors ensure that abusive transactions such as this one do not deceive the investing public?

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Definitions:

Lay Judgments

Decisions or opinions formed by non-experts based on common sense or personal experiences.

Good Target

An object or goal that is deemed particularly worthwhile, desirable, or suitable for pursuit or attention.

Social Expectancies

Presumptions or anticipations about the behaviors that are deemed acceptable or normal within a social context or group.

Self-Fulfilling Prophecy

A belief or expectation that influences actions in a way that causes the belief to become a reality.