ACCT $2520$ Case Assignment

SWO Ltd$.($SWO$)$ is a manufacturing company located in Southwestern Ontario, which is

publicly traded on the Toronto Stock Exchange. The company designs and develops stereo

equipment. Your accounting firm recently began to be the auditor of SWO. You are a senior

accountant with the firm, and have been assigned the year$-$end audit for SWO. Your firm$$s

partner has just met with the company$$s management in early January, $2024,$ and discussed

various accounting issues. The partner asked you to prepare a report to be provided to the client

that addresses some of the accounting issues occurred in $2023.$ These accounting issues are

listed as follows:

$1.$ During $2023,$ SWO purchased the $15\%$ equity of an electronic supplier. SWO provides

technical support to the supplier$$s operations and participates in its policy making.

Recently the supplier$$s business costs were significantly increased, resulting in

substantial losses and shortage of cash flows.

$2.$ SWO provides a ten$-$year warranty with all equipment sales. The warranty covers all

defects and breakdowns that are not directly related to regular wear and tear. Based on

the experience, SWO estimates the probability of an equipment making a warranty claim

during the next $10$ year of coverage is as follows:

Year $12345678910$

$1\%2\%2\%5\%5\%10\%12\%15\%18\%20\%$

The average retail value per claim is $$100$ currently and increases by $3\%$ every year. The

average cost of parts and service at SWO is about $60\%$ of the retail value. The effective

interest rate is $6\%.$

$3.$ At the beginning of $2023,$ the company granted options to the management to purchase

$80,000$ common shares. The options can be exercised any time within the next five years

at a strike price of $$5$ per share. The company expects that the period of benefit$/$service

for these options is three years. The fair value of the options, as determined using an

option pricing model, is $$900,000.$

$4.$ On July $1,2023,$ the company issued $20,000$ preferred shares for $$10$ per share to an

investment bank. Each preferred share is convertible for a fixed number of common

shares and has a mandatory $5\%$ annual dividend that must be paid on December $31$ of

each fiscal year. These preferred shares must be redeemed by the company in cash if the

market price of common shares exceeds $$10$ per share. Currently, the common shares are

in trading range around $$6$ per share.

$5.$ On September $15,2023,$ the company entered into a forward contract with the Bank of

Vancouver by locking the price of $600,000$ kg of aluminum at $$1\mathrm{.}50/$kg$.$ Aluminum is

used in the production of stereo equipment. As at December $31,$ the price of aluminum is

trading on the Chicago Board of Trade at $$1\mathrm{.}25/$kg$.$

Required

Prepare a report on your analyses of the company$$s accounting issues. Include and analysis of each issue and recommendations.