1 What are the major issue and the minor issues of this case? 2 How to analyze...

Fantastic news! We've Found the answer you've been seeking!

Question:

1 What are the major issue and the minor issues of this case?

2 How to analyze them in a financial accounting report?

Muskoka Limited Muskoka Limited (Muskoka) has been in the snowmobile custom manufacturing business for the last 20 years. Basically, Rolande Schitt, the owner, builds high-priced, customized snowmobile that take on average two years to build. The sales price of these customized snowmobile ranges from $10,000 to $15,000. His reputation is such that Rolande has never had to advertise. Rather, potential customers contact him, having heard of Rolande through word of mouth. Rolande has never had a dissatisfied customer and prides himself on high quality workmanship.

In the past, Rolande has always done his accounting on a cash basis; that is, expenses and revenues were recorded when cash changed hands. Also, Rolande has never had to externally finance the snowmobile construction since the business has always retained sufficient cash to internally finance the next snowmobile to be built. Last year, however, Rolande stripped all the excess cash from the business when he purchased his dream "cottage", a mansion on Lake Muskoka. As a result of this, Rolande found that he did not have enough cash to finance the construction of the next snowmobile to be built and had to go to the bank for a loan. The bank told Rolande that it would be happy to lend him the money as long as it could take his cottage as security. Also, the bank informed Rolande that it wanted GAAP financial statements (accrual based). Rolande reluctantly agreed to pledge his cottage as security and promised GAAP financial statements.

Rolande was not very worried about repayment of the loan since he had just received some very large orders. As a matter of fact, he had to hire additional contract mechanics to help him get the snowmobile built on time. Rolande also rented an additional barn in the local area so that he could work on the snowmobile at the same time. The barn that he normally rented was not big enough to house all the snowmobile.

Rolande also hired a secretary to help keep up with the filing and the paper work. For the first time, Rolande had the customer who placed the largest order sign a written contract due to the size of the custom snowmobile and the expensive special materials that had to be ordered. All other agreements were verbal, although the terms of the contracts were similar except for price and delivery date. The key terms of the contract were as follows:

• Purchase price $35,000.

• Delivery date June 30, 2020 (approximately 2 years).

• Downpayment of 10%; 20% on June 30, 2019; rest on delivery.

• Purchaser has the right to try the snowmobile out before last payment made; right to refuse to accept it if not satisfied.

Rolande to cover the cost of insurance while being built (Rolande just included this as a cost of building the snowmobile and passed it on to the customer anyway). At December 31, 2019, Rolande had completed about 2/3 of the work on the snowmobile and was ahead of schedule.

However, on the other snowmobile contracts, work was behind and they were only 10% complete. Rolande has come to you, his friend, a chartered public accountant, for advice on how to prepare the financial statements for the year ended December 31, 2019.