ACCOUNTING RESEARCH ASSIGNMENT #2 WINTER 2021

Your accounting firm has just been hired to perform the audit of a small, privately held Louisiana company called Delta Delights (DD) for the fiscal year ended December 31, 2020. You have been assigned to the engagement team for DD. You and the audit engagement manager have had an initial meeting with the controller of DD. Relevant information that you gathered at this meeting is provided below along with specific instructions that the engagement manager gave you following the meeting.

Accounting for and balance sheet presentation of adult frogs Among numerous other products, DD markets and sells a popular specialty-type kit for young and inquisitive elementary school children, called Water Pets. DDs customers for this kit are large toy and pet stores as well as high-volume discount retailers. Each Water Pets kit contains a small plastic aquarium-type tank, decorative gravel, two plastic plants, and a coupon that the buyer can redeem for a live tadpole. DD always maintains a large inventory of tadpoles so that buyers of the Water Pets kits who redeem coupons will receive tadpoles without delay. To ensure a ready supply of tadpoles, several hundred adult frogs are always on hand. Historically, the reproductive life of an adult frog has been estimated at roughly seven to nine months. Normally, as the reproductive lives of the adult frogs expire, they are harvested and sold to seafood restaurants on the Gulf Coast.

Currently, both the adult frogs and the tadpoles are classified and accounted for as inventory (a current asset) on DDs balance sheet. At December 31, 2020 the total carrying value of DDs inventory is $17,500. Of this amount, $11,500 is the carrying value of the inventory of adult frogs and the remaining $6,000 represents the carrying value of the tadpoles. During the most recent fiscal year, DD discovered that through a newly discovered selective breeding process the estimate of reproductive life of the adult frogs can now extend to somewhere between three and four years.

Instructions from the audit engagement manager The audit engagement manager has assigned you the task of 1) researching the accounting issue described below by using the FASB Accounting Standards Codification and 2) preparing an accounting issue memorandum to address the issue.

Accounting Issue: The effect, if any, that the increase in the estimated reproductive life of the adult frogs from roughly seven to nine months to between three and four years has on DDs financial statements and disclosure requirements for the fiscal year ended December 31, 2020.

The engagement team has separately determined that the accounting implications of this accounting issue are material to DDs financial statements. The analysis supporting this determination can be found in the audit workpapers at AA-B.

Week 2 assignment: Your group is to prepare a video presentation that focuses on the authoritative literature that addresses the issue above. No issue memorandum is required until Week 3. In your presentation you should a) summarize the case facts, b) illustrate (show the applicable paragraphs from the authoritative literature) and discuss the components of the authoritative literature that you used to address the accounting issue in the case, including disclosure and c) illustrate any suggested journal entry or entries if you discover that the one or more entries are needed (be sure to include an explanation of any suggested entries)