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Comments on the Financial Statement Notes

This Course Note Comments on the Financial Statement Notes and other 64,000+ term papers, college essay examples and free essays are available now on ReviewEssays.com

Autor:   •  August 9, 2018  •  Course Note  •  1,913 Words (8 Pages)  •  60 Views

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January 10, 2017

To: Asha Patel, Accounts Receivable Clerk

From: Kelly Wright, Corporate Accountant

Subject: Comments on the Financial Statement Notes          

I would like to address the financial statement notes you have presented. I will explain and analyze each issue and recommend a course of action.

Barbor sofa order

Issues:

 

  • The deposit of $9000 was recorded as revenue on December 13. However, this was not delivered until January 2, in this case, the revenue was recognized too early.
  • Since the revenue should not have been recognized, the sofas should be included in the ending inventory since the risk of theft, loss or damage was still carried by Modern.
  • The remaining cost of $13100 was recorded as sales and accounts receivable on December 28, however, it was not delivered until January 2.

Analysis:

According to ASPE 3400, revenue can only be recognized if all the following criteria are met:

  • Risk and benefits of ownership of the goods have been transferred to the buyer
  • This notion is not met since the order was not delivered until January 2, until then, Modern Design Co. had the risk and benefits of those items.
  • The amount of revenue is measurable
  • This is met since the total price of the order has been set and is measurable.
  • There is a reasonable assurance that considerations will be received
  • This is met since Barbor already paid a deposit to for the inventory.

Furthermore, according to ASPE 3031, inventory must be recorded at the lower cost and net realizable value

  • This is not met as Modern did not record the inventory at all.

Recommendation:

  • The deposit should be removed from the income statement and recorded as deferred revenue. The accounts receivable should be removed and sales would be reduced as well.
  • The inventory should also be increased by 14 sofas and recorded at net realizable value.

Impact to users:

  • The liabilities will increase since the deposit will be transferred to deferred revenue. Moreover, income will decrease because of this transfer. This will also increase inventory and decrease cost of sales. Accounts receivable and sales will decrease. Since they plan on expanding, investors and bank will not view this positively.

Lumber inventory

Issue:

  • The raw materials used for to produce lumber was received on December 31, but it was not included on the accounts payable and the inventory.

Analysis:

According to ASPE 3031, inventories are assets:

  • held for sale in the ordinary course of business
  • this notion is met since the raw materials were held to produce lumber for future sales. The term of purchase is also FOB destination, which means that at the time of arrival of the materials, the risk and benefits have transferred to Modern. The supplier no longer has any control nor responsibility of the materials.

  • in process of production for such sale
  • this notion is met as the raw materials underwent the normal process of production. It was ordered, received and was part of the production on January 3.
  • in the form of materials or supplies to be consumed in production process or rendering services
  • this notion is met as these raw materials were used in production of lumber on January 3.

Also, the term ‘FOB destination’ means that the seller owns the good until the buyer receives them.

  • Modern took responsibility of the raw materials as soon as it arrived at the warehouse.

Recommendation:

  • The raw materials should have been included in the inventory by calculating how much inventory can be carried out from the materials. As a result, inventory will increase.
  • Along with the inventory increase, the accounts payable related to the purchase of raw materials should be recognized as well, and will result to an increase liability

 

Impact on users:

  • The liability and inventory are understated since accounts payable and inventory were not recorded. After the appropriate adjustments, liability will increase along with the inventory.

Saw repair

Issue:

  • Modern expensed the saw repairs in the ‘repair and maintenance’ account. The issue is whether to capitalize or expense the repair.

Analysis:

According to ASPE 3061, an expenditure incurred is a betterment if it:

  • improves quality of the output of the asset
  • this notion is met as the staff saw a better performance after the repair
  • increase the quantity of the output of the asset
  • this notion is met as the production time would be cut by 10% and reduce waster by 5-10%, which means that Modern would be able to produce more in a little time with minimal waste.
  • extend useful life of the asset
  • this notion is met since the saw was expected to last for another five years beyond the date of repair
  • reduce the overall operating cost of the asset
  • this notion is also met as the saw has been repaired and will no longer need further repair cost. This would also reduce the waste by 5-10%, which mean the operating cost will further decrease.

Recommendation:

  • Based on the concept of betterment, this expense should be capitalized and should be removed from repair and maintenance expense.

Impact to users:

  • This will increase assets as it will be transferred to Property, Plant and Equipment from repair expense. This will also increase amortization expense and decrease repair and maintenance account. As a result, operating income will be greater. This affects both balance sheet and income statement.

National retail chain agreement

Issue:

  • Modern Design received a signing bonus and it was recorded as a revenue upon receipt on December 28, however the delivery was not until January 2. The issue is whether we should record the bonus as revenue or recognize over the life of the contract.
  • The remaining balance of $13,100 was also recognized as revenue on December 28 before it was delivered.

Analysis:

According to ASPE 3400, revenue can only be recognized if all the following criteria are met:

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