Terrific Titles Inc. (TTI) is a major publisher of books for postsecondary education. TTI is a Canadian public corporation. One of TTI’s major shareholders is Global Holdings PLC (GHC), a London- based media company. In early 20X4, TTI’s executives were preparing a bid to buy 80% of Ashwin Book Cor-poration of Canada ( TLC). At present, all of TLC’s common shares are owned by the com-pany’s CEO, Ashwin Joshee. If the sale goes through, Mr. Joshee will retain 20% and will continue as CEO and president of TLC for at least the following five years. TLC is a niche publisher that evolved from Mr. Joshee’s early endeavours in “vanity press,” wherein authors self- publish their own books. Now, however, TLC has a strong line of business books for the college and university market. A particularly strong aspect of the business is the accounting line, including such widely used titles as Indeterminate Account-ing ( by the eminent authors Conchee and Beerod) and Accounting Theory for Fun and Profit ( by Elizabeth Farroff). TTI is eager to acquire this line under the TLC imprint, pro-vided that a reasonable price can be negotiated with Mr. Joshee. TTI’s strategy is to acquire prominent high- quality publishing lines and expand them into international brands with the help of GHC, utilizing GHC’s financial and market strengths. Ian Fanwick is an accountant employed as an analyst by TTI’s strategic development department. The department’s executive director, Helen O’Malley, has asked Ian to pre-pare a report on certain accounting issues pertaining to TLC. She is concerned that TLC does not have adequate accounting controls in place, and she needs assurance that TLC’s reported earnings and net assets are properly reported. She needs to know if any of the company’s reported 20X3 numbers need to be adjusted before she finalizes TTI’s bid for 80% of TLC’s shares After receiving Ms. O’Malley’s request, Ian visits TLC’s head office in downtown Wind-sor, Ontario. The notes from his visit are as follows:
• TLC occupies 100% of a small building in a light- industrial area. TLC leases the building on a series of five- year leases, renegotiated at each renewal. The rental is $ 100,000 per month, and the current lease has 10 months to run. Rental rates in the area have been rising at about 6% per year.
• TLC has a small permanent staff. Acquisition is retained in- house, but developmen-tal editing and production are outsourced to freelancers, as is common in the industry. TLC’s production level is erratic because several of the books need revision at the same time. In contrast, TTI has a substantial in- house staff for editing and production because TTI’s large and more varied book list ensures a more constant level of activity.
• TLC, like other publishers, ships to book retailers (including college and university bookstores) on terms of 2%/ 90 days, net/ 6 months. TLC pays normal shipping costs, usually via truck from TLC’s Winnipeg warehouse. Air express for urgent orders is at the customer’s cost unless the urgency is TLC’s fault (e. g., out- of- stock, or delayed pub-lication). The company also gives a free copy (known as a “comp,” for complimentary) of a textbook to any faculty member who requests it, whether or not the book is adopted for his her or his course.
• Revenue is recorded when the books are shipped, FOB destination. The buyer is normally invoiced within 30 days of shipment. When a buyer pays within the 2% discount period, the discount is charged to interest expense.
• TLC accepts unlimited returns of unsold books within six months from the invoice date. In practice, as a small publisher, TLC accepts later returns, but only from colleges and universities to maintain good relationships with textbook selection committees. TLC does not accept returns of used or damaged books. Returned books are placed back in inventory at their original cost.
• Standard practice in the textbook business is that textbooks are never discounted by the publisher. Retailers usually add a 25% markup, although some “discount” book-sellers apply a smaller markup. The usual author royalty is 15% of the wholesale price, split among the authors as designated by the publishing contract. Sales representatives receive a commission of 15% on all institutional sales; on average, for all titles, 90% of sales are to colleges and universities.
• Each successful textbook is revised once every three years. The time span between the start of revision and the release of the book is 12 to 20 months.
• TLC provides supplementary material to instructors free of charge. Supplemental material usually consists of instructors’ manuals, solution manuals, and PowerPoint ™ presentations. These materials are essential for selling the books; no instructor would adopt a book that did not have the usual range of supporting resources. The cost of developing these materials is recorded as a deferred charge and amortized over the time span until the next revision— usually three years. Printing cost also is treated as a deferred charge.
• Increasingly, these supporting resources are being provided online rather than by print, which saves the publisher quite a lot of cost. TLC is not yet providing online resources for either the instructor or the students but plans to do so within the next two years. In 20X3, TLC spent $ 135,000 on developing an improved website to provide supplementary resources for both students and instructors for the company’s various books. The improved website is not expected not go “live” until early 20X6, after a sufficient quantity of electronic resources has been developed. The development cost was recorded as an intangible asset.
• Due to an impending major change in accounting standards effective in 20X6, the only accounting textbook to go through the revision cycle in 20X3 was Accounting Theory for Fun and Profit, as it would not be significantly affected by the changes— the sixth edition of this book was released in January 20X4.
• About 75% of TLC’s list will need to be issued in new editions by the end of 20X5 or the beginning of 20X6. TLC’s acquisition editors are currently negotiating with authors for new editions, while the production department is lining up copy editors, technical checkers, typesetters, and so on, as well as blocking time at the printing presses and binderies— on average, it takes four to eight weeks to print and bind a book’s print run,
depending on the size of the run. Press runs are for 1,500 to 6,000 copies, depending on the book’s popularity.
• After release of a new edition, a small inventory of that book’s previous edition is kept in stock for one or two years to satisfy residual demand by instructors who do not wish to switch to the new edition. All other copies are sent for recycling after release of a new edition.
• TLC carries its inventory of books and supplementary instructor resources at cost. Inventory cost for each title includes all editorial and publishing costs for that edition plus an allocation of general overhead. The total inventory cost is then divided by the number of copies in the initial print run to determine the cost per unit.
Assume the role of Ian Fanwick. Prepare the report for Ms. O’Malley.