You are the only CPA on the board of governance of Furn Inc., a furniture manufacturer. Furn Inc. is a private company owned equally by the daughter and son of the company founder and her husband, both now deceased. Furn has never had their financial statements audited. The siblings asked you to join the company board when they took over the company, as you had been a trusted long-term financial advisor to their parents. Before a board meeting you reviewed the company’s financial records for 2019, and have uncovered the following items:

1. During Fancy Ltd.’s 2019 liquidation sales, Furn purchased hardwood lumber, valued at $100,000 for $80,000. The accountant recorded the $20,000 difference between the fair value of the lumber and the purchase price as a gain.

2. A shipment of theatre chairs at $42,000, fully paid, was scheduled to be delivered on December 20, 2019 to a customer. However, Furn had to postpone the shipment until the next year. The accountant recorded the sales on the scheduled delivery date, along with the cost of the chairs of $31,000.

3. On December 5, 2019, Fenton Inc. signed a one-year lease with Furn for Furn’s vacant warehouse for $7,000 a month, effective January 1, 2020. Upon the signing of the lease, Furn received first and last month’s rent, which the accountant credited as rent revenue.

4. Furn purchased $15,000 of material from Gable Inc. on credit. Gable Inc. shipped the material according to the agreed terms of FOB shipping point on December 27, 2019. The shipment did not arrive at Furn’s by December 31, 2019 so was not included in Furn’s inventory at December 31, 2019.

In addition, one of the items on the board agenda is approval of the terms of the sale of some of Furn’s common shares to new investors to raise funds for expansion. The share price that the company will receive will be based on 2019 EBIT (earnings before interest and taxes) times an agreed multiple of 10. The information you received for the board meeting indicated that Furn expects to get a good price for its shares since 2019 was a record setting year for earnings. The controller commented before the meeting how relieved she was that the 2019 results were so good. She mentioned that the current shareholders had been pressuring her to make sure the new investors didn’t get too large an ownership percentage for their investment.

Required:

1. Prepare any necessary adjustments for Furn for each above item if you don’t agree with the treatment it received. If no adjustment is necessary, please indicate “No Adjustment”.

2. Explain what you did in (a) by applying at least one foundational principles or element concept to support your adjustment, or decision of no adjustment.

3. Do your findings regarding the transactions you analysed and your discussion with the controller give you any concern about the share sale approval? Explain. How would you deal with this at the board meeting?

Answer rating: 100% (QA)

Item Description Adjustment Required Principal or Concept to Support the Adjustment Hardwood Lumber ... View the full answer