Billy's Beats Inc. Case 11-8 Please see the Attachment. 
Case 11-8 Billy's Beats Inc. Billy's Beats Inc. (Billy's), an SEC registrant, is a new audit client with a fiscal year-end of December 31, 2010. Billy's manufactures musical instruments. Billy's acquired Little Drummer Boy Inc. (Little Drummer) in 2010 for $575 million in cash. Significant assets acquired included property, plant, and equipment totaling $865 million and other assets totaling $145 million. The useful lives assigned to the property, plant, and equipment acquired were 30 years for the plant and 15 years for the equipment. The useful lives for the plant and equipment already owned by Billy's are 20 years and 10 years, respectively. Acquired customer lists, included in other assets, were assigned a useful life of 15 years. To test the useful lives of the operating assets, the engagement team asked management why the number of years assigned to the plant and equipment acquired differed from the years assigned to that which Billy's had already owned. Management stated that the useful lives for the acquired assets were the amounts used by Little Drummer before the acquisition. The engagement team discussed the useful lives of the acquired property, plant, and equipment with the plant manager of Little Drummer. The plant manager stated that 30 years and 15 years for the plant and the equipment, respectively, were the useful lives used before the acquisition. This discussion was documented in the audit working papers. The valuation specialist allocated the plant fair value of $865 million to each asset class based on the percentage of the seller's total original cost applicable to each asset class. These percentages were provided by management of Little Drummer and relied on by the valuation specialist. The engagement team compared the percentage of total costs to a client prepared spreadsheet listing each asset class, asset ID, and percentage of total cost. No errors were noted and, accordingly, no further testing of the client-prepared spreadsheet was performed by the engagement team. In addition to its drum manufacturing business, Billy's also wholly owns RockOut Inc. (RockOut), which is the largest manufacturer of guitars in the United States. RockOut grew through the acquisition of other guitar companies and completed five, eight, and four acquisitions during 2010, 2009, and 2008, respectively. As a result of the acquisitions, RockOut reported approximately $90 million (15 percent of total assets and 60 percent of total intangible assets) of customer lists as of December 31, 2010. RockOut amortizes its customer lists on a straight-line basis over 25 years, which management believes reflects the pattern in which the economic benefits of the customer lists are used up. During 2010, management revised its estimate of the customer list economic life, and began assigning an amortization period of 15 years to newly acquired national customer lists. Amortization expense for the year ended December 31, 2010, was $3 million. To test the economic lives of the customer lists, the engagement team asked management what the reasoning was for the change in the assumed economic life this year. Management provided a memorandum that discussed the rationale for using the 25-year Copyright 2009 Deloitte Development LLC All Rights Reserved. Case 11-8: Billy's Beats Inc. Page 2 economic life to amortize the various customer lists, as well as the rationale for the current-year change in management's estimate of the newly acquired national customer lists lives. This memo was included in the audit working papers, but did not include any documentation from the engagement team. Required: For both Little Drummer and RockOut, determine whether the engagement team performed adequate and appropriate audit procedures considering management's assumptions. (Note that your focus should be on the audit procedures performed, not the accounting treatment.) If the engagement team did not perform adequate and appropriate procedures, describe what additional procedures you would have performed. Copyright 2009 Deloitte Development LLC All Rights Reserved
