At the end of its most recent fiscal year, Shangri-La Company owned the following investments.

Other assets had a book value of $2.4 million and liabilities had a book value of $2.8 million. Shangri-La’s net income for 2004 was $280,000. If the company sold investment A at the end of the year for cash, what effect would the sale have on its financial statements and return on assets (ignoring the effect of income taxes)? Assume that assets are reported on the financial statements at historical cost. What effect would the sale of investment B have on the company’s financial statements and return on assets? Compare these amounts to those that would be reported if no investments were sold. Does this example help explain why mark-tomarket accounting is often required by GAAP? Discuss.

Dunnam v. Burns

FACTS Defendant (Louis Dunnam) and Steve Oualline jointly borrowed $35,000 from plaintiff (Ken Burns) and agreed to repay the principal plus $5,000 six months later. After defendant defaulted on the loan, plaintiff sued to recover. Dunnam defended by claiming the loan was usurious. The trial court ruled in favor of the plaintiff, and defendant appealed.

DECISION Judgment for defendant

OPINION Defendant claims the trial court erred by refusing to submit his usury defense to the jury. Usury is interest in excess of the amount permitted by law. For most transactions between private persons, the maximum allowable rate of interest is 18 percent if the parties agree on a rate of interest and 6 percent if they do not. Persons who contract for or collect usurious interest are subject to penalties that may exceed the total value of the contract.
When money is advanced in exchange for an obligation to repay the advance plus an additional amount, the added amount is interest that may not exceed the statutory maximum. Thus, defendant’s absolute obligation to pay $5,000 in addition to the principal renders the additional amount interest. Plaintiff argues that he did not “charge” such interest because the instrument was drafted by defendant and because plaintiff was actually interested in collecting only the principal amount. However, a document that contains an absolute obligation to repay a loan together with interest in excess of the amount permitted by statute is usurious on its face. The specific intent of the lender is immaterial because it is presumed to be reflected in the document he signs. The drafter of the usurious promissory note is simply irrelevant. The instrument embodies a usurious transaction, and plaintiff, as the lender, contracted for usurious interest.

INTERPRETATION Usury statutes establish a maximum rate of interest for which a lender may charge a borrower.

CRITICAL THINKING QUESTION Should the law establish maximum rates of interest? If so, in what situations?