On October 1, 2014, Tesco announced that the U.K.?s financial watchdog, the Financial Conduct

Authority (FCA), had ?commenced a full investigation? of the accounting irregularities at the company. Unlike the US legal system, no provision exists under English law for class-action lawsuits, in which thousands of people can collectively file one big legal claim. In the US, lawsuits have been filed on behalf of investors who had purchased Tesco?s ADRs (American Depository Receipts).

Britain?s Serious Fraud Office (SFO) recently opened a criminal investigation into accounting irregularities at Tesco. The Company said that it has been ?cooperating fully with the SFO and will continue to do so.? The Financial Conduct Authority said it would stand aside, given the SFO?s decision to investigate. The SFO declined to comment further, citing the investigation. Such investigations can take years to complete.

On February 5, 2015, the Groceries Code Adjudicator (GCA), UK?s first independent adjudicator to oversee the relationship between supermarkets and their suppliers, joined SFO in investigating Tesco. The adjudicator said: ?I have reasonable suspicion that Tesco breached the code in two areas. One is reasonable payments and second is payments for better positions on shelf outside promotions.?

(a) On September 1, 2013, CPC recognized the refund paid to Tesco (?800 million) as SGA (Selling, General and Administrative) expenses, and Tesco recognized it as turnover (i.e. sales revenue). At the end of the contract period (August 31, 2014), the refund amount was calculated based on Tesco?s actual purchases during the contract period (3.75 billion units at ?2 per unit)) and the refund transaction was settled in cash between the CPC and Tesco. CPC recorded this amount as an adjustment to SGA, and Tesco recorded it as an adjustment to turnover (sales revenue).

Compute the amount of refund Tesco earned for the 12-month period ending August 31, 2014 and explain whether or not the accounting treatment of sales allowances described above would comply with the U.S. GAAP for (i) CPC and (ii) Tesco. Cite paragraphs from the appropriate professional pronouncements.

(b) Complete the following table for CPC for the 12-month period ending August 31, 2014.

(c) Explain the plausible motivations of CPC?s management to recognize sales allowances in

SGA expenses.

(d) Complete the following table for Tesco for the 12-month period ending August 31, 2014. Assume that all inventory purchased from CPC is sold by Tesco before the end of the 12- month period.

(e) Explain the plausible motivations of Tesco?s management to recognize sales allowances in turnover (sales revenue).

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Current contract period Previous contract Correct amounts per U.S. GAAP Reported Adjustments, if any Item period amounts Sales Cost of goods sold Gross margin SGA expenses Operating profit 7,000 3,500 3,500 7,500 3,750 3,750 560 2,940 750 3,000 Current contract period Adjustments, Correct amounts if any Previous contract Item Reported period per U.S. GAAP amounts Sales Cost of goods sold Gross margin 7,420 6,440 8,700 7,500 980 1,200 Current contract period Previous contract Correct amounts per U.S. GAAP Reported Adjustments, if any Item period amounts Sales Cost of goods sold Gross margin SGA expenses Operating profit 7,000 3,500 3,500 7,500 3,750 3,750 560 2,940 750 3,000 Current contract period Adjustments, Correct amounts if any Previous contract Item Reported period per U.S. GAAP amounts Sales Cost of goods sold Gross margin 7,420 6,440 8,700 7,500 980 1,200

Answer rating: 100% (QA)

a Refund Calculations Total purchased 375 billion units 375 2 75 billion pounds As 375 billion units are more than the threshold of 37 billion units required for 10 discount there for the total refund ... View the full answer