CASE 2 Modern Electronics Inc. (MEI) is a retailer that sells televisions, audio systems, computers, gaming consoles, related accessories, and appliances such as washing Modern Electronics's machines. Since its founding in 1995, MEI has grown to 28 locations across the product service plans country. Many of the products stocked by MEI have warranties provided by the manufacturer, (25 minutes) typically ranging from 90 days to one year. In addition to these manufacturer's warranties, MEl offers its customers, for a fee, "Guaranteed Advantage Plans" (GAPs). The box below provides a description of the Guaranteed Advantage Plan. 12. Various facts for this case have been obtained from Harris Collingwood, David Sherman, and David Young, Profits You Can Trust: Spotting and Surviving Accounting Landmines. Upper Saddle River, NJ: FT Prentice Hall, 2003. Benefits of our Guaranteed Advantage Plan: Your ers' have the We day. We'll do our best to fix your product. If we can't, we'll replace it. All free of charge while your product is covered by Guaranteed Advantage. If you decide to resell the product some time in the future, Guaranteed Advan- tage goes along, so you'll be able to get a better price. Profits You Can Trust: Spotting and Surviving Accounting Landmines. Upper Saddle River, NJ: FT Prentice Hall, 2003. 0. Mini-Cases 19 The fee and the coverage under the Guaranteed Advantage Plan differ according to the type of product and the option chosen by the customer. As a representative example, MEl offers the following coverage for a $1,500 television: Competitors such as Best Buy and Future Shop also offer similar service plans. The GAPs are highly profitable for MEI. On average, the cost of fulfilling the guarantee is well under a third of the fee charged to the customer. Because of this low cost, the company is considering a short-term promotion whereby customers would receive, for no additional charge, the shortest GAP available for the product purchased. The customer can obtain a longer GAP by paying the differential. In the above example, a customer who purchases the $1,500 television would receive the two-year plan for free, but could pay $60 to obtain the four-year coverage. Required: Assume that it is the first year that the company has offered the Guaranteed Advantage Plans. As the company's controller, prepare a memo to MEl's CFO explaining the accounting issues surrounding the GAP and how it affects the accounting for products sold. Assume that the company follows the guidance provided by IFRS