General Household Appliances (GHA) is a closely held company owned by the Hillis family. The company has a long history dating back to the early 1900s. The company manufactures small household appliances, such as toasters, blenders, coffee makers, and indoor grills. GHA’s products are well known for their quality and affordability. The company follows IFRS.

Recently, the company has been experiencing poor financial results due to increased competition, lack of new product development, and the increasing power of the retailers in the supply chain. As a result, Larry Hillis, the former CEO, was recently relieved of his duties.

On September 1,2017, the board of directors elected to hire Martha Blazeski as the new CEO. Martha is a well known turnaround specialist and is the first person outside of the Hillis family to become CEO of GHA.

It is now January 7, 2018, and GHA is preparing for its December 31, 2017 year-end financial statement audit. GHA is a long standing client of the public accounting firm of Lebeau and Liang, LLP. You are the senior accountant with Lebeau and Liang, LLP who is responsible for GHA’s audit. The partner in charge of the audit recently met with Martha, and has provided you with a copy of the draft financial statements (Exhibit I) and notes from her meeting with Martha (Exhibit II). The partner has asked you to prepare a memo to the audit file that addresses your concerns regarding:

1. Identify key users of the financial statements and their objectives
2. List all the issues in the case. List the GAAP principle and a few words about the issue using case facts. i.e. revenue recognition, contract 123.
3. Analyze qualitative and quantitively (if applicable) three financial accounting issues using IFRS standards supported by case facts and provide recommendations for each financial accounting issue.

Required

Prepare the report for the audit file.

EXHIBIT II - NOTES FROM THE PARTNERS' MEETING
WITH MARTHA

»      Martha signed a 16-month contract on September 1, 2017. Martha was paid an upfront signing bonus of $80,000, a monthly salary of $2,000, and a bonus of 15% of 2018 net income. The signing bonus was paid in September, and expensed in fiscal 2017 as part of the wages and benefits, administration. The bonus is not repayable if Martha leaves prior to the 16 months.

»    On August 1, 2017, GHA entered into a sales agreement with SuperMart, a large Canadian retailer.

Under the terms of the agreement, GHA shipped 70,000 coffee makers to SuperMart, which placed the products in special display booths throughout its stores in Canada. SuperMart is able to return any unsold appliances to GHA up to February 1, 2018 (just after the holiday season). The coffee makers are sold to retailers for $22 each and have a cost of $10 each.

Past history under similar arrangements suggests that at least 60% of the appliances are sold during the holiday season (i.e., just before New Year's Eve). Martha has decided not to record any revenue until the right of return period lapses.

»    On July 1, 2017, GHA exchanged 10,000 coffee makers to TeleCo, a large telecom company, in exchange for $280,000 worth of telecom services. The coffee makers have a cost of $14 and a retail value that ranges between $25 and $30 per unit. TeleCo plans to use the coffee makers in the staff-rooms of its offices across North America. Martha posted the following journal entry:

      Dr Other Assets              250,000    Cr Inventory $250,000

»     GHA operates a small number of outlet stores that distribute their products. Martha has accrued a $100,000 liability for the closing of two unprofitable stores. Martha is currently unsure which stores will be closed, but is very sure that two stores will be closed in 2018, resulting in severance pay and other closing costs. The expense has been included in the general and administrative expenses.

In fiscal 2016, 10,000 can openers held in inventory were written down from their historical cost of $5.50 each to their net realizable value of $4.00. The write-down was a result of a decrease in demand for the product due to child safety concerns. In fiscal 2017, a total of 5,000 of these can openers were sold. The can openers were sold for $7.50 each as it appears that the child safety concerns have subsided.

»     On December 1, the company paid $250,000 in order to undertake a large marketing campaign. The marketing campaign is intended to help re-brand the company's products and to increase customer awareness of the company's product offering. The marketing campaign began in December and will run for four months over the Internet, television, radio, and on billboards. The entire $250,000 is included in the marketing and sales expense.

»     During the year, GHA designed and developed a new technology for a toaster that toasts bread more evenly than the toasters on the market. The following costs were incurred during the year related to the toaster and were expensed:

Developing heat insulation technology: Developing inner toaster technology: Design of toaster outer casing: Patenting of toaster technology:        Testing the prototypes prior to  commercialization

35,450 95,900 37,500 21,500 48,000 $238,350

The toaster technology is expected to generate additional net cash flows of $35,000 for the next five years. Martha has expensed all of the costs as part of general and administrative expenses.

 » On November 1, GHA was sued by a competitor for a patent infringement suit. Legal counsel suggests that GHA will be liable to make a payment. There is a 30% chance of a $50,000 payment, a 50% chance of a $100,000 payment, and a 20% chance of a $150,000 payment. Martha recorded a $150,000 contingent liability.

Answer rating: 100% (QA)

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