Bronwyn Boats Limited (BB) has been in the yacht-building business for the last 20 years. Basically, Bob, the owner, builds high-priced, customized boats that take on average two years to build. His reputation is such that Bob has never had to advertise. Rather, potential customers contact him, having heard of Bob through word of mouth. Bob has never had a dissatisfied customer and prides himself on high quality workmanship.

In the past, Bob has always done his accounting on a cash basis; that is, expenses and revenues were recorded when cash changed hands. Also, Bob has never had to externally finance the boat construction since the business has always retained sufficient cash to internally finance the next boat to be built. Last year, however, Bob stripped all the excess cash from the business when he purchased his dream "cottage", a mansion on Lake Muskoka.

As a result of this, Bob found that he did not have enough cash to finance the construction of the next boat to be built and had to go to the bank for a loan. The bank told Bob that it would be happy to lend him the money as long as it could take his cottage as security. Also, the bank informed Bob that it wanted GAAP financial statements (accrual based). Bob reluctantly agreed to pledge his cottage as security and promised GAAP financial statements. Bob was not very worried about repayment of the loan since he had just received some very large orders. As a matter of fact, he had to hire several assistants to help him get the boats built on time. Bob also rented an additional barn in the local area so that he could work on the boats at the same time. The barn that he normally rented was not big enough to house all the boats. Bob also hired a secretary to help keep up with the filing and the paper work.

For the first time, Bob had the customer who placed the largest order sign a written contract due to the size of the boat and the expensive special materials that had to be ordered. All other agreements were verbal, although the terms of the contracts were similar except for price and delivery date. The key terms of the contract were as follows:

• Purchase price $500,000.
• Delivery date June 30, 2016 (approx 2 years).
• Downpayment of $50,000; $100,000 on June 30, 2015; rest on delivery.
• Purchaser has the right to try the boat out before last payment made; right to refuse to accept it if not satisfied.
• Bob to cover the cost of insurance while being built (Bob just included this as a cost of building the boat and passed it on to the customer anyway).

At December 31, 2015, Bob had completed about 2/3 of the work on the boat and was ahead of schedule. However, on the other boats, work was behind and they were only 10% complete.

Bob has come to you, his friend, a chartered public accountant, for advice on how to prepare the financial statements.

Questions to consider in providing your written solution can be:

1. Who will be the users of financial statement? What type of risk will the users be facing? What type of risk will Bob and you as a CPA be facing when preparing financial package?

2. How will Bob receive his revenue? Think of revenue recognition principle & collectability. Tell me how you will prepare the income statement on revenue collection. Is it based on estimate billing? or progressive collection? or collected all at the end of project?

3. How will Bob recognize his costs? Are all costs related to making a boat? (also called product cost) or non-related to boat as in period costs or admin? Are costs based on estimate as well?

4. If there is any disclosures to note, what will it be? Please provide it if any.