Actg Lecture8 Case
Actg Lecture8 Case
Actg Lecture8 Case
CASE
Re: Issues of concern regarding the purchase of Daphne’s Catering Ltd Business
Overview
Constraints:
ASPE – I will assume ASPE because DCL is a small private company that only had one
location in Ontario. The owner also has possession of all the shares of the company.
IFRS – In the case that DCL or you upon purchase wish to expand, then IFRS principles
will be used instead as it is easier and cost effective to expand through this method.
Conflict/Ethical Considerations:
There is a conflict between Joe and Daphne’s objectives. You wish to minimize net
income, while it would benefit Daphne to maximize the net income.
ASPE is also an ethical consideration, because the accounting principles must be
followed throughout the reporting of statements.
Accounting Issues:
Issue 1: Whether the cost associated with the remaining 60% of brochures that are stored
should be capitalized or expensed
Analysis: There are 2 alternatives: considering this an asset or expense
Expense – You will benefit if this is expensed, decreasing net income
Capitalize Asset –
Present control?
Yes, DCL has control over the brochures
Result of past transaction?
Yes, the transaction has already occurred in October 2019
Future probable benefit?
No, there is no future benefit, as the brochures were only designed
specifically for the year 2019. At the end of this year, the brochures will not
be effectively used.
Is the good/service measurable?
Yes, 60% of the brochures are in question currently
The brochures do not meet the criteria of being classified as an asset
Conclusion: Since the brochures do not classify as an asset, this cost should be expensed. This
will benefit Joe as it would decrease the net income by $19,000, ultimately reducing the
purchase price for Joe, saving him money.
Since the criteria for capitalizing the cost is not met, it should be expensed
Conclusion: The $55,000 R&D cost should be expensed, because it does not meet the asset
criteria. This would decrease the net income by $55,000 and in turn benefit Joe by reducing the
purchase price.
Conclusion:
Net income in 2019 - $160,000
Net income in 2020 - $275,000
Current Purchase Price = 550,000 + 5[1/2(160,000 + 275,000)]
= 1,637,500
Net Income for 2020 after adjustments made in the report
= 275,000 – 19,000 – 45,000 – 55,000
= 56,000
Final Price = 550,000 + 5[1/2(160,000 + 56,000)]
= ????????
DISCOUNT STORES LTD CASE
To: Ruth Bogan
Overview
Constraints:
ASPE – I will assume ASPE because Discount Stores Ltd is a medium sized private
company that is wholly owned by the Bogans. They have several medium sized locations
in Ontario, but the owners have possession of all the shares.
IFRS – In the case that DCL or you upon purchase wish to expand, then IFRS principles
will be used instead as it is easier and cost effective to expand through this method.
Conflict/Ethical Considerations:
There is a conflict between Harry and Ruth’s objectives. You wish to minimize net
income, while it would benefit Harry to maximize the net income.
ASPE is also an ethical consideration, because the accounting principles must be
followed throughout the reporting of statements.
Accounting Issues:
Issue 1: Whether the 50% of advertising costs should be capitalized or expensed
Analysis: There are 2 alternatives: considering this an asset or expense
Expense – You will benefit from this as it would decrease the net income
Capitalize Asset –
Present control?
Yes, they have control over the advertising campaign
Result of past transaction?
Yes, the transaction has already occurred
Future probable benefit?
No, the company had success from the campaign, but in the past, there is no
promise for future benefit
Is the good/service measurable?
Yes, 50% is the amount in question
The advertising cost does not classify as an asset
Conclusion: Since the advertising costs cannot be deemed as an asset, they cannot be
capitalized. Thus, 50% of the advertising costs will be expensed. Expensing this cost will
decrease net income and benefit you.
Conclusion: Since it is slow-moving inventory, while you may not be able to sell it there are still
chances you will. You cannot assume a NRV of 0. Harry’s judgement can result in a biased
approach. Therefore, I would recommend you collect more information and research further
and then design a detailed approach to handling slow moving inventory. This would limit bias
and easily and accurately product correct figures on the financial statements.
Since the criteria for capitalizing the cost is not met, it should be expensed
Conclusion: Therefore, you can use the 5 year method because it favours the Bogans.
Conclusion:
SAMPLE CASE TEMPLATE
Re: Issues of concern regarding the purchase of Daphne’s Catering Ltd Business
Overview
Constraints:
ASPE – I will assume ASPE because DCL is a small private company that only had one
location in Ontario. The owner also has possession of all the shares of the company.
IFRS – In the case that DCL or you upon purchase wish to expand, then IFRS principles
will be used instead as it is easier and cost effective to expand through this method.
Conflict/Ethical Considerations:
There is a conflict between Joe and Daphne’s objectives. You wish to minimize net
income, while it would benefit Daphne to maximize the net income.
ASPE is also an ethical consideration, because the accounting principles must be
followed throughout the reporting of statements.
Accounting Issues:
Issue 1: Whether the cost associated with the remaining 60% of brochures that are stored
should be capitalized or expensed
Analysis: There are 2 alternatives: considering this an asset or expense
Expense – You will benefit if this is expensed, decreasing net income
Capitalize Asset –
Present control?
Yes, DCL has control over the brochures
Result of past transaction?
Yes, the transaction has already occurred in October 2019
Future probable benefit?
No, there is no future benefit, as the brochures were only designed
specifically for the year 2019. At the end of this year, the brochures will not
be effectively used.
Is the good/service measurable?
Yes, 60% of the brochures are in question currently
The brochures do not meet the criteria of being classified as an asset
Conclusion: Since the brochures do not classify as an asset, this cost should be expensed. This
will benefit Joe as it would decrease the net income by $19,000, ultimately reducing the
purchase price for Joe, saving him money.
Since the criteria for capitalizing the cost is not met, it should be expensed
Conclusion: The $55,000 R&D cost should be expensed, because it does not meet the asset
criteria. This would decrease the net income by $55,000 and in turn benefit Joe by reducing the
purchase price.
Conclusion:
Net income in 2019 - $160,000
Net income in 2020 - $275,000
Current Purchase Price = 550,000 + 5[1/2(160,000 + 275,000)]
= 1,637,500
Net Income for 2020 after adjustments made in the report
= 275,000 – 19,000 – 45,000 – 55,000
= 56,000
Final Price = 550,000 + 5[1/2(160,000 + 56,000)]
= ????????