Alright Beverages Ltd. (ABL) was federally incorporated in 19X0. In the initial years, the company produced a cranberry drink for sale at sporting and entertainment events in eastern Canada. In 19X7, operations were expanded to include sales to bars, restaurants, and fast food outlets. To penetrate additional markets, ABL started manufacturing a wide variety of fruit beverages and acquired the distributorship of another company’s fruit concentrate. Sold under the brand name “Fruit Brite,” the fruit beverage sales were only moderately successful.
In 20X0, a management review indicated that while sales of the new fruit beverage line had increased, ABL’s cost to manufacture was also greater than that of its competitors. Much of the profit was being made on the distribution of the fruit concentrate. In an attempt to improve profitability, the company entered the retail market in 20X1. To finance the expansion, ABL obtained funds from two sources, bank loans and its first public issue of shares. The funds were used to purchase a bottling plant in Toronto and to provide working capital during the first year of operation. The retail operation was administered by a newly incorporated, wholly owned subsidiary, Fruit brite Flavors Ltd. (FFL). In the first year the company incurred a loss on its retail operations, but subsequent years were profitable.
FFL continued to expand until it had a nationwide bottling and distribution network. In major cities the bottlers were wholly owned subsidiaries of FFL; in smaller cities, the bottlers were independents who bottled other products as well. In all cases, ABL sold its fruit concentrate to the bottlers.
In 20X4, ABL acquired 70% of the shares of Concentrated Vending Ltd. (CVL), a manufacturer of fruit beverage vending machines located in Windsor, Ontario. ABL purchased CVL at a price well below its proportionate carrying value, since CVL had encountered financial difficulties. ABL lent CVL funds to finance a plant modernization program. ABL contracted with the founders of CVL to continue as senior management since ABL had no experience in the equipment manufacturing industry. The management contract stipulated that a bonus would be paid, amounting to 20% of CVL’s income before taxes, in each of the next five consecutive years. Although the plant modernization was successful, CVL had difficulty selling enough machines to achieve a break- even point.
Sales of fruit beverages through vending machines were growing rapidly with the increased awareness of the importance of a healthier lifestyle. This was a segment of the market in which the ABL group did not participate. Therefore, early in 20X6, ABL created a wholly owned subsidiary, Vend Sell Ltd. (VSL). VSL buys the machines from CVL at regular retail price and then sells them to local operators with the condition that only ABL products be sold in the machines. The intent was to place machines in as many locations as possible.
VSL sells the majority of machines under conditional sales contracts, in which the buyer agrees to make an initial payment of $ 500 and payments of $ 75 per month for the next 48 months, for a total of $ 4,100. Machine maintenance is the responsibility of the operator.
The payment plan was devised with three objectives in mind:
1. To place the maximum numbers of machines by the use of an easy payment plan;
2. To defer payment of income tax by deducting the full cost of the machines when sold and deferring recognition of the revenue until the cash was collected; and
3. To ensure that only ABL products were used during the payment period, since title to the machine would not transfer until all payments had been made.
The fruit concentrate for the machines is purchased by the local operators from the bottler in the particular area, who in turn had purchased the fruit concentrate from ABL. The operator is charged an amount equal to the cost to the bottler plus 20%.
During 20X6, VSL expects to buy 8,000 machines from CVL at a price of $ 5,000 each. The machines currently cost CVL $ 3,000 each to manufacture. This cost to CVL is significantly lower than in previous years. To supply VSL, the volume of production in 20X7 is expected to be twice that of 20X5. As a result, CVL expects to show a profit in 20X6.
By the end of 20X6, VSL expects to sell 6,800 machines. The revenue from initial payments will amount to $ 3,400,000 and VSL expects to receive total revenues of $ 5,100,000 from initial payments and installments in 20X6.
In its annual report for 20X5, ABL reported after- tax earnings of $ 4,575,000 on consolidated revenue of $ 77,970,000. Since CVL accounted for less than 10% of ABL’s consolidated assets, revenues, and income, no segmented information was presented in the 20X5 annual reports.
Within the management of ABL there is disagreement over the proper accounting treatment for the activities of ABL, VSL, FFL, and CVL for 20X6 and the effect on consolidation and reporting.

Required
In August 20X6, you were engaged as an independent advisor. Prepare a report in which you:
1. Outline the major accounting and reporting issues faced by the company and its subsidiaries;
2. Identify alternative policies to deal with the issues outlined; and
3. Provide recommendations on the preferred policies.