Following the trend of naming companies after fruits, Great White North Inc. (GWN), a public company, started a new company called Peach Ltd. (Peach) to break into the cellular phone industry in 2015. Their first product, the M-One, was a modular cell phone in which customers may buy the base phone for $300 and subsequently purchase modules to customize and upgrade the phone. The idea was that instead of releasing a new phone every year the company would only upgrade modules in which customers could purchase and upgrade the phones themselves. 

Modules include a swappable larger screen, more memory, and a supersize battery. Unfortunately, the M-One was plagued with technical problems and GWN wanted to shut down Peach and cut its losses. Solving all the technical problems GWN made a final attempt to make Peach a success by hiring Mr. Holmes as the new CEO. As part of his hiring condition Mr. Holmes had to meet performance objectives for the 2016 – 2018 years. 

At which point Mr. Holmes would receive a $5,000,000 bonus if by the end of 2018 Peach’s net income exceeded $50 million. As it turned out Mr. Holmes was able to meet all the performance objectives for the 2016 and 2017 fiscal years. It is now February 1st, 2019. Peach's financial statements for the year ended December 31, 2018 have been received at GWN's corporate offices. Peach's net income for 2018 is reported to be $50,600,000. GWN's CFO has examined the financial statements and is satisfied with most aspects of them but is concerned with the reporting of some transactions and economic events listed below. The CFO has asked you, an accountant in GWN's finance department, to prepare a report evaluating the issues. 

Mr. Holmes has already called the CFO to arrange a meeting to discuss the financial statements and the payment of his bonus. The CFO wants your report to explain the problem in each issue, identify reasonable alternatives, and provide full support for your recommendations. 

1. On July 29, 2018, the company made a payment of $280,000 to a computer programmer who managed to duplicate the computer software that allows the M-One modules to operate with the base phone. The programmer had given the company fourteen days to pay, or she would sell the information to a competitor. Management believed that if the information was obtained by a competitor, it would have significant negative consequences for the company. Peach has capitalized the amount of the payment and is amortizing it over the remaining life of the related asset. Subsequently Peach applied for a patent to protect against similar situations from arising in the future. 

2. In the last week of December 2018, Peach shipped a $1,000,000 order to a new customer with the new super battery. The customer has been having financial difficulties, so Peach provided special financing terms that gave the customer six months to pay instead of the usual 30 days. Payment is guaranteed by the company that owns the customer. The super battery M-Ones sold came with a six-month warranty, the standard warranty offered to all customers. The order was scheduled to be shipped in early January, but because of an opening in the production schedule Peach was able to complete the order several weeks early. Once the order was completed, it was shipped to the customer. The customer agreed to accept early delivery before Peach shipped the order. The cost of the order was $650,000. The goods were received by the customer on December 31, 2018. Peach recognized revenue when the goods were delivered, as it normally does. 

3. In late January 2019 one of Peach’s customers filed for bankruptcy, which Peach had suspected might occur because the customer was already four months behind on payments. 

Peach’s management thinks it’s very unlikely that it will collect any of the $75,000 owed by the customer. Peach has not adjusted the financial statements for the event but there is a note describing the event and its impact. Following a review in December 2018 of the useful lives of the M-one production facility, management extended the life of Peach’s production facility and some of its equipment. Mr. Holmes claims that given the success of the M-One the product life for the M-One is now longer than expected so therefore it was natural to also extend the life of the production facility. The change reduced the depreciation expense in each of the next four years by $28,000. Hints: The following questions may provide you some guidance as you work through the case: • An explanation of your role (what are your objectives). 

• Identification of who will be preparing the financial statements and a description of what the preparer’s objective of financial reporting is. Identify any conflicts between you (or your client) and the preparer.

 • Identification and explanation of any constraints. 

• For each accounting issue you should: o Identify what the issue is. o Explain the impact of the accounting method used in the financial statements on your client. o Identify the criteria, principles, standards, concepts, rules, etc. that you will use resolve the problem. o Apply the criteria, principles, standards, concepts, rules, etc. to the facts that describe the accounting issue. Explain whether the accounting treatment used by the preparer is consistent with the criteria, principles, standards, concepts, rules, etc. and explain how any alternative you propose is consistent with the criteria, principles, standards, concepts, rules, etc. o Make a recommendation and explain how your recommendation serves your client’s interests. 

• Discuss the quantitative implications of your recommendations

Answer rating: 100% (QA)

solution of this problem is given below 1 a The issue is that the sum of 280000 paid to the computer ... View the full answer