Listre & May $($Pty$)$ Ltd is a medium$-$sized Namibian real estate company. It was founded five

years ago by its two principal shareholders, Wilson Listre and Brown May. Wilson is the chief

executive officer $($CEO$)$ of the company, and Brown is chief operations officer in charge of sales

and marketing. Litre & May $($Pty$)$ Ltd in the recent past has enjoyed tremendous growth since its

inception by aggressively seeking out property listings for residential real estates in a popular

local newspaper column and simultaneously paying a generous commission to selling agents as

its main operational and business strategy.

Generally, the company receives a $6\%$ commission for selling a client's property and gives two$-$

thirds of this out, or $4\%$ of the selling price to the selling agent. For example, if a house sells for

N$ $800,000,$ Litre & May receives N$ $48,000$ and pays N$ $32,000$ of this to the selling agent.

Usually at the time of the sale, the company would record increases in Accounts Receivable and

similarly Sales Revenue of N$ $48,000$ respectively. The accounts receivable is normally collected

within $30$ days according to industry norms. Also at the time of sale, the company records

increases in Commissions Expense and Commissions Payable of N$ $32,000$ each respectively.

Sales agents are paid by the $15$th of the month following the month of the sale that is within $30$

days. In addition to the commissions expense, Litre & May$$s other two major expenses are

advertising of listings in local newspapers and depreciation of the company's fleet of Cadillacs

cars $($Listre believes that all of the sales agents should drive state of the art Cadillacs as branding

signatures$).$ Normally, the newspaper adverts run for one month, and the company has until the

$10$th of the following month to pay that month's bill. The Company$$s automobiles are

depreciated over four years $($Listre doesn't believe that any salesperson should drive a car that is

more than four years old$).$

However, due to a downturn in the economy in Southern Africa, property sales have been

sluggish for the first $11$ months of the current year, which ends on June $30.$ Listre is very

disturbed by this slow sales of this particular year because a large note payable to a local bank is

due in July and the company is planning to ask the bank to renew the terms of the note for

another three years. Nonetheless, Listre seems less concerned by the unfortunate timing of the

recession and has come up with some suggestions as to how he and May can $$paint the rosiest

possible picture for the banker$$ when they go for the loan extension in the coming July. In fact,

Listre has some very specific recommendations for you as the Company$$s accountant and

financial controller how to account for certain transactions during June, which is the last month

in the Company$$s fiscal year anyway.

You are the financial controller for Listre & May $($Pty$)$ Ltd and have been treated very well by

Listre & May since joining the company two years ago. In fact, Listre insists that you drive top$-$of$-$

the$-$range Cadillac. The following are his suggestions for painting the rosy picture of the company

in consideration by the bank:

i$.$ First, for any sales made in June, we can record the $6\%$ commission revenue immediately

but delay recording the $4\%$ commission expense until July, at the time the sales agent

need to be paid in cash. Since we will record the sales at the same time we always have,

and the sales agents get paid when they always have been; in this manner the bank

would see how profitable we have been, we get our loan, and everybody is happy

anyway!

$3$

ii$.$ Second, since we won't be paying our advertising bills for the month of June until July $10,$

similarly we can wait until then to record the expense. This timing seems perfect since we

are meeting with the bank for the loan extension on July $8.$

iii. Third, since we will be depreciating the fleet of $$Caddys$$ for the year ending June $30,$

how about changing the estimated useful life on them to eight years instead of the

current four years? For this we won't say anything to the sales agents as it is a book

entry; as there is no need to rile them up about having to drive their cars for another

eight years. Anyhow, the change to eight years would just be for accounting purposes. In

fact, we could even switch back to four years for accounting purposes next year.

Likewise, the changes in recognizing commission expense and advertising expense don't

need to be permanent either; these are just slight bookkeeping changes to help us mange

the income and get over the imminent financing hump!

Required

$1.$ Briefly explain why each of the three proposed changes in accounting will result in an

increase in net income for the year ending June $30,2020.(5$ marks$)$

$2.$ Identify any concerns you have with each of the three proposed changes in accounting

from the perspective of GAAP i$.$e$.,$ do the financial statements still faithful