Case Study Athina
We have prepared an insightful report on our findings and recommendations as asked for by the SCOFF of the national chain.
Though the SCOFF is homo we are reporting too, we have considered how our advice will affect other key stakeholders of Athena such as the investors and CRA (assuming it is a Canadian firm), as it is inevitable to undermine the recommendations’ impact on them as well. First and foremost, even though Athena Building Supplies Ltd. Is now a private business It was once linked to a national chain.
Assuming the national chain complied under FIRS, It would prove more reasonable to Incur less costs of switching to ASPS and also to continue using FIRS In case Atlanta requires a bank loan or ultimately plans for an PIP In the future (since Investors currently are foreseeing success and growth for Athena). Athena was sold to its present investors for $1 as they believed that the stores would be more successful if they were managed by companies with expertise in the particular department. If Athena earns a net income of over $500,000, it must pay 25% to the national chain up until 2019 (2017-2019).
Athena has recently closed their 2017 financial statements and have a new income of $510,000. This reveals that according to Athena investors, the national chain is presently owed $2,500. The users of the financial statements would most importantly be the SCOFF, followed by the Investors. The SCOFF and investors have two very contradicting objectives, on one hand, the Investors will want to Meltzer their Income because If their Income exceeds $500,000, 25% of It must be paid to the national chain for the next three years (from 2017 to 2019).
On the other hand, the SCOFF will want to maximize Thane’s net income to guarantee receiving 25% from investors. The last objective, stewardship was also kept in mind while reaching to a conclusion because Thane’s investors are responsible for managing it on behalf of the national chain thus they must report their financial statements to the national chain.
In this report we will be focusing on income minimization as the main objective since the SCOFF is the primary user. We will also be considering income minimization and stewardship as secondary objectives to show opposite impacts.
ISSUE 1 As a retail and commercial building supply dealer, Atlanta does business In cash and credit transactions. Customers are given up to 90 days to pay, and no customer has defaulted on any amounts they owe as of yet. As of December 31, 2017 customers owe $275,000 and costs associated with this revenue Is $150,000 however Atlanta does not recognize these sales as revenue because cash has not been collected yet.
In efforts to support ten primary adjective, ten SO/5,U snow a De recognized relent away since all five FIRS criteria is met by doing so (Refer to Appendix 5).
Once the sales have been made the risks and rewards of ownership are transferred to customers thus Athena no longer has control. The figure of the amount for revenue and cost is clear and collection is reasonable as Athena has mentioned no customer has ever defaulted. With all of this in mind, there is no reason Athena cannot recognize the $275,000 except that it will not meet their income minimization objective, but it will meet the Coffs objective. Thus the $275,000 and the matching cost of $1 50,000 should be recorded right away.
ISSUE 2 In 2017, it was discovered that certain assets purchased several years ago were not depreciated.
It is inevitable to avoid expensing the depreciation cost of $175,000 for these assets, however in order to comply with the primary objective and still correctly report the depreciation expense in the 2017 financial statements, a solution has mom to our attention. Generally, depreciation expenses with assets are recorded right away, yet Thane’s management failed to do so as an error and therefore this can be seen a usual/non-recurring item.
The solution is to deduct the $175,000 as an unusual/non-recurring expense after a net income has been calculated for the business’s normal transactions (Refer to Appendix 1). Objectives of the investors will not be met with this solution as it maximizes income and pay out amount, but their method is still correct as well. ISSUE 3 In mid-2013 (assuming April), Athena obtained a five year dealership for kitchen beanies, the contract was not renewed in 2017 but $210,000 were spent by Athena within 2013-2107 to set up displays to promote the line.
210,000 was capitalized and amortized over 10 years, and since it was discovered the products will not sell beyond April 2018, the amortized portion was written off. The displays’ expense at December 31, 2017 becomes $105,000, meaning a remainder of another $105,000 is left to be expensed. (Refer to Appendix 2) In order to support the primary objective, and also provide a benefit for Thane’s management, the remaining $105,000 should have not been written off in 2017 but instead in 2018.
This is beneficial in two ways, not expensing the amount in 2017 meets the Coffs income minimization objective and for Thane’s management, because they are now aware they will not be able to sell the products beyond 2018, they should still use the remaining displays they have to sell as much of the product possible before April 2018 to attempt to cover or reduce the write-off cost. With this attempt, they are also not violating the matching principle in case they do make sales in 2018, then they will have the write-off cost to match with their revenue (Refer to Appendix 2).
ISSUE 4 From examining the income statement and balance sheet for the year-end 2017, we learned that Athena purchased fairly old and poor condition heavy equipment at an auction for $225,000 and thus it needed repairs worth $125,000.
These repairs prolonged its life for at least another ten years. The $225,000 was capitalized and $125,000 was expensed. Whether the $125,000 is a repair expense or betterment, is ambiguous therefore it is up to Athena to decide if capitalizing or expensing it is more beneficial to their reporting objectives.
We as consultants believe, the repair cost of $125,000 should to have been expensed, but rather capitalized making the equipment worth was ten cost to repair ten 010 equipment, it was made to improve the asset and increase its useful life hence making it betterment. When this asset is capitalized, the cost would be spread out over ten years and Just the yearly depreciation would be expensed.
By eliminating the repair expense of $125,000, the net income and retained earnings are increased, subsequently, and comply with the Coffs objective.
Since income minimization is the primary objective, it is vital to capitalize the equipment for $350,000 and record a appreciation expense of $35,000 annually. Even though for Athena, the alternative of expensing the repair would mean a lower net income and compliance with their objective, it is a poor managerial decision because the equipment has more value now due to its extended life, which occurred only because of the repair and this must be acknowledged (Refer to Appendix 3).
ISSUE 5 On July 1 5 2017, Athena signed a ten-year contract for $200,000 (non-refundable fee) with J. Alexander & Songs Plumbing Ltd.
To run their plumbing department. Capitalizing this asset is inappropriate because according to FIRS, it has no future infinite hence should be recorded as revenue. This revenue could be recorded in two ways. The first option is to recognize the $200,000 all at once or recognize it as unearned revenue and recognize the revenue over the term of the contract.
Both are valid options and follow the five revenue recognition criteria set by FIRS (refer to Appendix 4). The alternative that maximizes the net income and meets the primary objective is recognizing all of $200,000 at once.
Once the contract has been signed and the $200,000, non-refundable fee has been handed over to Athena, risks and rewards of ownership are transferred to J. Alexander & Songs Plumbing Ltd. The figure of the amount for revenue and cost is clear and collection of the fee has already occurred, also displaying Athena no longer having control over the department.
The second alternative meets the same criteria but does not match primary objective as you record portions of the $200,000 ($20,000 each year= $200,000/arrears) as it is earned. Since the main objective is to increase net income, and all five revenue recognition criteria have been met under FIRS, there is no constraint forbidding Athena to record it in 2017. This is not ideal for investors, as they now have to pay a larger 25% from the net income, but legal for the SCOFF to request of Athena to report the total amount all at once.
