Practice of Channel Stuffing

Homework Essay Help: Finish Requirement 1-3

Requirement 1

a. Does the use of masking prices violate GAAP? Why? Is it appropriate for Toshiba to increase

profit (by the amount of the masking difference) at the time of supplying parts to ODMs? 

Why? When and how should Toshiba record the masking differences in its consolidated 

financial statements? Explain.

b. For the PCs that are manufactured by its subsidiary TIH, is it appropriate for Toshiba to record 

the masking difference as a reduction in the cost of goods manufactured? Why?

Requirement 2

a. Refer to the table of masking differences in the ‘Practice of Channel Stuffing’ section of the 

case. For each fiscal year from 2008 to 2014, compute the income misstatement and specify 

whether the reported income is overstated or understated. For simplicity, assume that there 

were no masking differences at the beginning of FY 2008. Present your answer in the 

following table:

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

Income misstatement

Overstated or understated?

b. The table of masking differences indicates that the total masking difference declined 

noticeably in FY 2010. Why do you think Toshiba’s management was willing to reduce the 

masking difference in FY 2010? The masking difference was again reduced sharply in FY 

2014. What could have caused that to happen?

Requirement 3

Assume that TTIP, a fully-owned subsidiary of Toshiba, purchased key PC parts and supplied 

them to Pegatron, an Original Design Manufacturer (ODM) in Taiwan, for assembling PCs. The 

price paid by TTIP was ¥24,000 per PC. However, to keep Pegatron from knowing TTIP’s true 

cost, the parts were supplied at the masking price of ¥84,000 per PC. In other words, the 

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