BUSI 2130

Fall 2021

Case Assignment # 2

Due Friday, October 29 @ 10AM

Alpamayo Ltd. is a Canadian manufacturer of outdoor furniture. It manufactures a wide range of high-quality, durable, and attractive furniture and other outdoor seating, outdoor dining tables, gazebos etc., designed for summer use at cottages and on patios. Alpamayo is owned by a small group of individual investors who take pride in selling Canadian made products.

Its late October 2021. You are a CPA who was recently hired as Alpamayo accountant. You reporting to Alpamayos CFO. Alpamayo has a bank loan, and as part of the ongoing reporting, Alpamayo is required to provide financial statements. The loan agreement requires that Alpamayo maintain a current ratio greater than 1.25 and a debt-to-equity ratio below 1.6 at the end of each quarter. If Alpamayo violates either of the covenants, the terms of the loan will be subject to renegotiation and perhaps repayment. Violating the covenants would also make it significantly less likely that the bank would provide Alpamayo with the additional financing, which it would need if it were able to secure some of the larger contracts that it has been working on this year.

The loan officer has approached Alpamayo regarding some of the transactions that took place during the third quarter and the CFO has asked you to prepare a response. The accounting for the events described below were made by the previous bookkeeper, who is not a CPA and who no longer works for Alpamayo.

Alpamayo follows ASPE.

Summarized balances at the end of Alpamayos third quarter (September 30, 2021):

Current assets	$11,475,000
Non-current assets	42,525,000
Current liabilities	9,180,000
Non-current liabilities	23,580,000
Shareholders equity	21,240,000
Net income	525,000

During the third quarter, Alpamayo spent $112,500 trying to win a large contract to supply patio furniture to a group of resorts across the country. $112,500 in costs were incurred and included costs for executives to meet and entertain representatives from resorts head office, the development of a marketing campaign, and preparation of information packages on their products. While Alpamayo was hesitant to spend such large costs on a potential client, management is confident that the deal could result in hundreds of thousands of dollars of purchases on an annual basis, and would result in exposure across the country. Alpamayo recorded the $112,500 as a non-current asset and plans to begin amortizing it over the three-year contract period.

In July 2021, a customer sued Alpamayo when their furniture fell apart, and a customer was injured. The customer claims that the patio chairs design was flawed and resulted in it breaking. Alpamayo suspects that it was poorly maintained by the customer. As of September 30, 2021, the lawsuit had not been settled. The customer has sued Alpamayo for damages of $200,000. While Alpamayo doesnt believe its at fault, the companys lawyers have suggested that they attempt to keep the claims out of the media and out of court. Similar claims have been settled with the customer for $20,000 - $100,000 in recent years. A loss of $200,000 has been recorded for the lawsuit in the third quarter.

In August 2021, Alpamayo began purchasing some of its raw materials from a new company, Huaraz Inc. Huaraz is considered a related party to Alpamayo since it is owned and operated by a family member of one of the owners. During the quarter, Alpamayo paid $225,000 for raw materials that they purchased from Huaraz. The materials will be used to build its furniture. Huarazs normal selling price would be $280,000, which is consistent with the amount Alpamayo has paid from competitors in the past. As such, Alpamayo recorded the materials as supplies inventory totaling $280,000.

Considerations for analyzing the case:

1. Explain your role. Given this role, how will you be approaching your task?
2. Identify any constraints that limit or affect the accounting choices that Alpamayo can make. You may have to make assumptions if relevant information isnt specifically given to you.
3. Identify the important facts that will help you understand the circumstances that Alpamayo and your client are operating under. Explain why you identified each fact and why you think it is important.
4. What is/are the objectives of financial reporting of Alpamayo? Why do you think Alpamayo has these objectives? Rank the objectives you identify in order of importance. Explain your ranking.
5. What are the objectives of financial reporting of the bank? Why do you think the bank has these objectives?
6. Are the objectives of Alpamayo and the bank the same? Does it matter if the objectives of Alpamayo and your client are different? Explain.
7. Explain why the objectives of financial reporting of Alpamayo and your client are important to your analysis.
8. Consider any quants you should do before you analyze the issue. Why is this important?
9. For each accounting issue incorporate the following into the analysis:
   1. Explain what the accounting issue is. These will be related to things we have discussed in the course and include things like definitions of assets and liabilities.
   2. Explain how Alpamayo accounted for the transaction/economic event. Explain the impact this accounting treatment had on the financial statements and on your client. (Consider this from the perspective of your clients objectives of financial reporting.)
   3. Do you think the accounting treatment used by Alpamayo is appropriate? When responding apply the relevant criteria, concepts, characteristics, principles, etc. Fully explain your analysis. A good analysis should include linking together the facts pertaining to the transaction/economic event with the relevant criteria, concepts, characteristics, principles, etc.
   4. If you dont think the treatment applied by Alpamayo is appropriate, provide an alternative. It should be clear why your alternative is appropriate and consistent with the relevant criteria, concepts, characteristics, principles, etc.

NOTE: A good analysis in iii and iv should include linking together the facts pertaining to the transaction/economic event with the relevant criteria, concepts, characteristics, principles, etc.

9. 5. Explain if, how, and why either your recommended alternative treatment or the treatment used by Alpamayo (if you think the Alpamayo treatment is appropriate) meets the objectives of financial reporting of your client.
   6. Consider the impact of your recommendation on any important quantitative aspects of the course.
10. Throughout your analysis incorporate any relevant numbers and calculations.
11. Provide an overall conclusion about how you have been able to serve the needs of your client.