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[INSERT TITLE HERE] 6
Running head: [INSERT TITLE HERE]
[INSERT TITLE HERE]
Student Name
Allied American University
Author Note
This paper was prepared for [INSERT COURSE NAME],
[INSERT COURSE ASSIGNMENT] taught by [INSERT
INSTRUCTOR’S NAME].
PART I: SHORT RESPONSE
Directions: Please respond to each of the following questions.
Write at least 3 to 5 sentences for each question.
1. List and explain the four items under the umbrella of
owner's equity, including whether it increases or decreases

overall equity.
2. What is the fundamental accounting equation, including
examples of each item of the equation?
3. Explain the separate entity concept, including why it is
important to accounting.
PART II: APPLICATION
Directions: Please answer each of the following questions.
Show your work as necessary.
1. T. Richtor established her own business, called Richtor's
Self-Storage. Use the account headings presented below in the
expanded accounting equation to record the monthly
transactions.
Assets
=
Cash + Accounts Receivable + Supplies + Prepaid Insurance +
Office Equipment
Liabilities
+
Owner's Equity
Accounts Payable
Expenses
a.
Deposited $12,000 in a bank account in the name of the

business.
b.
Bought office equipment on account from Molly Company,
$3,100.
c.
Paid rent for the month, $2,400.
d.
Bought supplies for cash, $450.
e.
Paid wages, $980.
f.
Received cash for storage services, $3,600.
g.
Received and paid the utility bill, $252.
h.
Paid Lar's Graphics for advertising, $428. (The bill was not
previously recorded.)
i.
Paid for a one-year liability insurance policy, $835.
j.
Billed customers for storage services on account, $3,370.
k.
Received cash for storage services, $2,300.
l.
Paid wages, $990.
m.
Paid Molly Company $1,100 as partial payment on the office
equipment bought in transaction b.
n.
Richter withdrew $1,200 for personal use.
Instructions:
1.
Record the transactions in columnar form, write plus and minus
signs, and show the balance after each transaction to be sure
that the equation remains in balance.

2.
Write the proof of totals at the bottom to show that one side of
the equation equals the other side.
Assets
=
>
Accounts
Prepaid
Office
>
Cash
+
Receivable
+
Supplies
+
Insurance
+
Equipment
=
>
a.

=
>
n.
>
Bal.
=
>
<
Liabilities
+

Owner's Equity
<
Accounts
T. Richtor,
T. Richtor,
<
Payable
+
Capital
Drawing
+
Revenue
Expenses
<
a.
+
<
b.

Bal.
+
+
<
n.
<
Bal.
+
+
Left Side of Equals Sign:

Right Side of Equals Sign:
Cash
$
Accounts Payable
$
Accounts Receivable
T. Richtor, Capital
Supplies
T. Richtor, Drawing
Prepaid Insurance
Revenue
Office Equipment
Expenses

2. On September 1 of this year, B. Rourk established Rourk
Delivery Service. During the month, the company had the
following transactions:
a.
B. Rourk invested $24,000 in the business (increase Cash;
increase B. Rourk, Capital).
b.
Bought two used delivery vans from The Van Lot for $20,000
and paid $5,000 as a down payment (increase Delivery
Equipment, $20,000; decrease Cash, $5,000; increase Accounts
Payable, $15,000).
c.
Received $2,500 in cash for delivery services (increase Cash;
increase Delivery Service Income).
d.
Received bill from Central News for advertising, $350 (increase
Advertising Expense; decrease Cash).
e.
Billed Hager Surgical Supply for delivery services provided,
$620 (increase Accounts Receivable; increase Delivery Service
Revenue).
f.
Received and paid telephone bill, $100 (decrease Cash; decrease
Telephone Expense).
g.
Rourk invested in his business office equipment having a fair
market value of $960 (increase Office Equipment; decrease
Cash).
h.
Received and paid bill for gas and oil, $150 (decrease Cash;
increase Maintenance Expense).
i.

Paid $350 to Central News to pay account in full (increase
Advertising Expense; increase Cash).
j.
Received $2,900 cash for delivery services performed (increase
Cash; increase Delivery Service Revenue).
k.
Rourk withdrew $1,100 for personal use (decrease Cash;
increase Wages Expense).
l.
Received $400 from Hager Surgical Supply to apply on account
(increase Cash; increase Delivery Service Revenue).
m.
Paid wages to part-time employee, $800 (increase Wages
Expense; decrease Cash).
Instructions:
Find six errors that were made in recording the transactions, and
state how they should have been recorded.
3. L. Hamilton established his own business, called Fix-It
Yourself. Using the fundamental accounting equation, record
the transactions for the month provided below for the business:
Assets
=
Liabilities
+
Owners Equity
Accounts Used
Owner deposited $5,800 in a bank account in the name of the
business.Company bought equipment, paying cash, $1,500.L.
Hamilton invested personal equipment in the business with fair
market value of $3,300.Company bought supplies on account
from a creditor, $750.Company paid creditor from transaction d,
$250.Owner deposited $1,000 in personal checking account.

Instructions:
1.
Record the transactions in columnar form including the
following:
*write plus and minus signs,
* show the balance after each transaction to verify
*and list the account titles needed to record each transaction.
2.
Write the proof of totals at the bottom to show that one side of
the equation equals the other side.
Assets
=
Liabilities
+
Owners Equity
Accounts Used
a.)
=
b.)
=

e.)
=
f.)
Assets
=
Liabilities
+
Owners Equity
=
+

For internal PwC use only, not for further distribution outside
of PwC
Case Study Overview
Forensics
Post financial crisis, the banking industry faced a number of
challenges. Consolidation
among surviving entities in the industry created complications
amongst IT, financial, and
data systems. Surviving management teams inherited unresolved
and complex financial,
legal and regulatory issues.

By 2011 the industry faced litigation on a number of fronts
related to perceived inappropriate practices during the
credit bubble and subsequent crisis. This litigation took several
shapes.
Fannie Mae and Freddie Mac alleged that they had been misled
when they purchased what were presented as high
quality mortgage backed securities, which subsequently lost
significant value. They alleged that the banks had painted
a false picture of the characteristics and risks of the underlying
mortgage backed securities. A mortgage backed
security’s risk profile is dependent on the creditworthiness of
the ultimate borrower, the origination and underwriting
policies that were used when making the loan, and the loan
characteristics. For example, it has been alleged that banks
utilized certain vetting procedures before loans were purchased
for securitization, when in fact they were not, that the
percentage of homes that were owner occupied was lower than
advertised, and that Loan to Value (LTV) ratios were
higher than stated. (Refer appendix 1 for definitions).
It has also been alleged that banks generated profits at each step
of the loan generation and securitization process and
were thus incentivized to simply generate as much volume as
possible, without regard to loan quality. Many banks

responded by arguing that they also suffered large losses and
thus had “skin in the game” as well.
Attorney Generals of various states filed cases alleging, among
other things, that banks had engaged in “Robo-signing”,
whereby bank representatives signed home foreclosure
documents without actually reviewing the accompanying
paperwork to verify that it was in order and the borrower was in
fact in default.
Similar foreclosure practice class action lawsuits were brought
by private homeowners.
Other lawsuits were brought concerning loan modification
practices. The Home Affordable Modification Program
(HAMP) was a federal program that required certain banks to
perform loan modifications and other foreclosure
prevention services. Many banks signed up for the program as a
condition of receiving TARP (see appendix) funding,
but were subsequently investigated for not implementing its
mandates.
ABC Financial
In this environment, Jamie Smith, CEO, was brought in to take
control of ABC Financial. ABC Financial is a mid-size

bank with $800B in assets. ABC was formed through the
combination of a legacy financial institution with several
banks that it acquired and consolidated under the ABC name.
While the ABC’s Board is hopeful that the combinations
will eventually lead to greater profitability, in the medium term,
ABC has inherited potential litigation which it needs
of PwC
to address. The challenges faced are complicated by the number
of financial and IT systems being combined under one
roof. An organizational chart indicating how ABC was formed
is shown below:
ABC Financial—Newly Formed
Financial Holding Company
XYZ Financial— Legacy Bank M&M Financial— Newly

Acquired Financial Institution
Various Smaller Banks—
Recently Acquired
The largest consolidation occurred with M&M Financial, which
individually comprised a 25% increase in loans. XYZ
and M&M accepted TARP funds and are subject to the
requirements of HAMP.
XYZ and M&M Loan Business
M&M had a different loan origination practice, served a
different customer base and region, and used a different IT and
servicing system (in which consumer, loan, and payment data
was entered, updated, and processed) than XYZ. XYZ and
M&M systems had not been integrated since the merger, making
it difficult to run analytics on the entire population of
loans originated and serviced. In addition, there were different
official written polices as to originating and servicing
loans for the legacy branches and departments.
These policies included: dealing with issues such as which
applicants were extended loans and at what terms;

procedures when customers fell behind on payments; providing
potential mortgage relief or forgiveness; and
foreclosure and default practices. It was unclear to what extent
these policies may have been deviated from. A table
with estimated Loan Book Value (LBV), foreclosure rate, and
modification rates is shown below:
Table 1
Values in Thousands (000’s) USD
Legacy XYZ
Legacy M&M
Other
ABC Financial
Loan Book Value 100,000,000 25,000,000 15,000,000
140,000,000
Foreclosure Rate 1.80% 2.50% NA
Mortgage Modification Rate 2.00% 7.00% NA

Customers of both legacy branches have filed complaints with
state Attorney Generals alleging that they were
improperly foreclosed upon. The other banking institutions
acquired did not have residential loans and are not relevant
to the current issues faced by the business.
M&M’s mortgage origination and servicing practice was
formerly headed by Sarah Banks, who was known to be a
very active manager who communicated frequently with
subordinates about the goals, benchmarks, and practices
of the group. An email from Sarah Banks has been included for
PwC review. The equivalent group within XYZ was
headed by Lou McGee, known for his insistence on meeting
deadlines, completing work, and not revisiting items after
a decision has been made. ABC management has been made
aware that Lou was proud that his group had a lower loan
modification rate than any comparable group in the industry.
M&M Investment Banking Division
Prior to the credit crisis, M&M operated an investment banking
group that was active in the securitization of mortgage
loans underwritten and serviced by M&M financial. After
pooling and securitizing loans, they generated prospectuses
for the resulting bonds and sold them to investors. They also

had a proprietary trading desk, which could purchase
and sell these bonds on the open market. Poor performance in
the investment banking group partially lead to M&M’s
takeover by ABC Financial. An email from Pat Diamond, ABC
Director of Finance, reviewing the performance of one
M&M securitization deal has been included for PwC review.
of PwC
Before being acquired, M&M was served with lawsuits from
private investors alleging that the quality of loans backing
the issued bonds did not meet the terms of the prospectus. Many
of the former employees of the investment banking
division had not been retained through the merger. According to
past records, the terms in the prospectus for the
underlying loans were based on the written policies of M&M’s
loan origination group.
IT and Data Issues
Since the formation of ABC, the two legacy IT staffs have not
integrated data. In the absence of an integrated IT
platform, the legacy IT staffs continue to exchange information,
via ad hoc means such as email. The data they

worked with was typically stored on their workstations and on
network shares to which the individual teams had
access.
Much of the mortgage transactional data was stored natively in
different servers and was never combined once the
merger occurred because the data was dissimilar and the
organization was not confident they could successfully
merge the databases without losing significant data. M&M
operates a legacy mainframe system while XYZ
operates a homegrown system with an Oracle back end database.
Two attempts were made to build a unified
system but both efforts were abandoned due to complexity and
issues with verifying the completeness of data
during the prototyping phase.
It was common for mortgage account managers to request data
to be extracted from the servers and commingled
with other servers to produce sales results. The commingling of
data typically occurred on the mortgage account
mangers’ workstations and data was exchanged via email.
Summary

Clearly, the organization had legal risks that threatened to
weaken the financial position of the bank, hurt its
reputation, and distract management and employees from day to
day execution. After discussions with the Chief Legal
Officer and outside counsel, Jamie Smith made the decision to
retain PwC to assist with the situation. A few issues were
foremost in Jamie’s mind:
- The number of legacy data, IT, and servicing systems
presented a challenge to ABC, both in quantifying the
population of data relevant and estimating the financial risks,
and in accurately responding to financial and loan data
discovery orders.
- Concern over meeting requirements to provide internal emails,
memos, financial documents, and other information
that was relevant to the proceedings, and to perform analytics
on outstanding data in different locations and formats
in response to litigation.
- The risk that official policies concerning loan origination and
treatment were directly circumvented or erroneously
not followed.

- Concern that certain customers may have been improperly
foreclosed upon and/or not made aware of applicable
mortgage loan modification programs as required.
- The aggregate actual characteristics of the loans which backed
mortgage securities compared to the characteristics
advertised in the prospectus.
- The overall profitability (or losses) that typically occurred on
a mortgage backed bonds issued by M&M during the
relevant period.
of PwC
APPENDIX 1
Definitions
- Securitization: The financial practice of pooling various types
of contractual debt such as residential mortgages,
commercial mortgages, auto loans or credit card debt
obligations and selling said consolidated debt as, for
example, bonds.

- Loan Pools: A group of mortgages, potentially with similar
characteristics such as location, loan value, etc.
- Loan to Value: The ratio of the first mortgage loan as a
percentage of the total appraised value of real property.
- TARP: A government program created for the establishment
and management of a Treasury fund in an attempt to curb
the ongoing financial crisis of 2007-2008. The TARP gives the
U.S. Treasury purchasing power of $700 billion to buy
up mortgage backed securities (MBS) from institutions across
the country, in an attempt to create liquidity and un-
seize the money markets.
- HAMP: A loan modification program introduced in 2009 to
promote stability in the housing market. The Home
Affordable Modification Program was aimed at helping
homeowners who were devoting more than 31% of their gross
income toward mortgage payments. Eligible homeowners can
receive adjustments to the mortgage principal, interest
rate or payments in order to get the percentage of income going
to payments below 31%.
Sources: Investopedia and Wikipedia

*Note—Both Core and Forensic Technology Service
Professionals will meet with Jamie Smith. Core professionals
are not
expected to address deep technological issues.
APPENDIX 2
2
Email Recovered from Legacy M&M Email System
To: Managers, M&M Residential Loans Group
From: Sarah Banks
Date: October 11, 2006, 2:05pm Eastern Standard Time
Subject: Goals and objectives, no excuses
Team, I am disappointed we did not meet our goal of originating
$2B in loans in the 3rd quarter. I have heard the comments that
many
applicants would go over our written loan to property value
maximum of 85%. To me that sounds like an excuse. Property
values have

been on an upward trajectory and I think we are missing out on
opportunities. Whatever needs to be done to meet your
individual goals
should get done. Some of you are not being “creative” or
aggressive enough.
I don’t need to tell you the pressure we are under to generate
enough loans for the folks over in the investment banking
division. They
package our product and no one was happy when they had to
buy loans from 3rd party originators last quarter to meet their
targets.
Everyone knows how profitable that group is. You need to do
whatever is necessary to ensure that that profitability is
maintained and
that we are all in a position to meet our targets so we get paid
bonuses.
NO MORE EXCUSES!
Email from Pat Diamond, Director of Finance
To: Jamie Smith, CEO, ABC
From: Pat Diamond, Director of Finance, ABC
Date: March 15, 2012, 3:05pm Eastern Standard Time
Subject: Our initial review of the M&M Mortgage Securitization
Trust 1 Deal

Jamie, as we discussed, I had our Finance team try to value
M&M Trust 1 Deal as of April 1, 2011. This trust was formed
to take in loans, securitize them (combine pools of loans to
form bonds), and then sell the bonds on the open market or
retain them. The trust was owned by M&M.
There were significant issues with gathering data and we are
still not confident in all our inputs. That being said, here
are our initial results:
Value in thousands (000’s) USD - The Trust 1 Deal
Category Value
Loans on date originated/purchased (Q3, 2004): 1,000,000
Loans on date transferred to trust (March 1, 2005): 1,020,000
Proceeds, Bonds formed from loans and sold to 3rd parties
(April 1, 2005):* 1,010,000
Bonds formed from loans and retained by Trust (As of April 1,
2005):* 40,000
Bonds Retained by Trust (As of April 1, 2011): 1,000
*The value of the bonds sold and retained exceeds the loans
transferred to the trust because the securitized bonds are

valued higher than individual loan pools.
APPENDIX 2
3
Interestingly, we had discussions with Jim Jackson, one of the
few legacy M&M investment employees left, and he told
us to look in to the group’s hedging practice. We found
evidence of the following on the books:
Value in thousands (000’s) USD
Category Value
Holdings Designed to Hedge Loans (Q3, 2004) 1,000,000

Holdings Designed to Hedge Loans (Sold March 1, 2005)
977,000
of PwC. ABC Financial is a fictitious company created for the
purpose of administering a
hypothetical business case scenario for recruiting interviews.
©2015 PricewaterhouseCoopers LLP, a Delaware limited
liability partnership. All rights
reserved. We are proud to be an Affirmative Action and Equal
Opportunity Employer.

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