Warmth Home Comfort Limited ( WHCL ) is a Canadian manufacturer of furnaces and air - conditioning
Question:
units. The company was acquired by a group of investors in the early s Three of the investors are
senior managers with the company, including Jacob Kovacs, who is president and chief executive officer.
Over the years WHCL had been quite successful, but it has struggled in the face of increased competition
from overseas competitors. The owners believe that three years from now WHCL will be poised to be a
major player in the Canadian and the US heating and cooling markets and may consider going public.
Summary financial statements are provided in Exhibit I. Kovacs points out that the companys financial
performance seems to be improving, given the smaller loss in and the increasing revenues after two
years of falling sales.
Your firm has been auditor of WHCL since its first audit in It is now January This is the first
year you are in charge of the audit. Yesterday, you visited WHCL and met with key personnel to discuss
the forthcoming audit engagement. You obtained the following information.
In early fiscal the company increased its debt load significantly by borrowing $ from
Colo Investors Ltd Excerpts from the loan agreement are as follows:
Warmth Home Comfort Limited the borrower covenants that:
a A current ratio of or higher will be maintained, and
b the debttoequity ratio will not exceed : Debt is defined as all liabilities of the company.
In WHCL introduced a new model of gas furnace that was popular with consumers because
its reduced gas consumption resulted in lower heating bills. The furnace design has remained
virtually unchanged since it was introduced. The furnaces are sold with tenyear warranties on parts
and labour. Historically, claims have been minimal.
In the summer of several warranty claims were made against WHCL Routine inspections by
gascompany employees revealed cracked heat exchangers, which could leak gases that might cause
health problems when mixed with warm air in a home. Thirty claims were made, and WHCL paid
for repairs. The cost of repairing each furnace was $ which was expensed by WHCL
Jacob Kovacs believes that the furnaces were damaged because of poor installation by contractors.
He cannot see more than an additional or units being damaged. The repaired furnaces were
manufactured in and Over units of this model have been sold over the past five
years.
Later, in a discussion with the chief engineer, you learn that she had examined the heat exchanger
used in the gasfurnace model in question and saw no evidence of a design flaw. However, she
expressed concern that the problem might be due to heavy use of the furnace. She noted that the
reported problems were in northern locations where the demands on the equipment are considerable.
Between and furnaces were installed in homes in those locations.
Uniform Evaluation.
QUESTION
WHCL has been working on a new technology for heating office buildings. Expenditures on the
new technology are summarized in Note of Exhibit I. The project began in early
According to management, the project is nearing the end of development, and it is now only a
matter of time before it is successfully brought to market. Jacob Kovacs does not think that it will be
possible to bring the project to market in the coming fiscal year without additional financing. He is
optimistic that negotiations with a private investor will be successful, allowing the project to go
forward. Kovacs estimates that an additional $ to $ is needed to bring the product to
market.
In January WHCL bid on and won a $ million contract to supply heating and air
conditioning equipment for a large commercial and residential project. Construction on the project
began in March
The fixedprice contract calls for WHCL to start delivering and installing the equipment in early
September In addition, WHCL has agreed to pay a penalty if the project is delayed because
WHCL is unable to meet the agreedto timetable. A brief strike by its factory employees has caused
production and delivery to lag about two weeks behind schedule, so WHCL is shipping units as
soon as they are produced. According to the agreement, half of the equipment has to be shipped and
installed at the project site by the end of February Jacob Kovacs is confident that WHCL will
be able to catch up to the promised timetable.
In WHCL recognized $ of revenue based on the number of units shipped to year end.
WHCL has received $ for the units that have been installed by year end.
Starting in February WHCL will begin offering customers the option of paying a monthly fee
for the use of a furnace. At the end of a certain number of years, the customer.
Intermediate Accounting
ISBN: 978-0077400163
6th edition
Authors: J. David Spiceland, James Sepe, Mark Nelson