CASE 6-1 SOLAR POWER INC. Solar Power Inc. (SPI) is a public company manufacturing and distributing solar panels. It has been in existence for the past ten years, of which the last three have been as a public company. To date SPL has experienced good growth rates, slightly higher than industry averages. Historically, the company had only been a distributor of solar panels and solar power consulting. However, due to the high demand for solar panels and a potentially growing market in Campen the time. In order to face this now the combat The other landing any cannot cuced the The company is required to file with the hannot EBITDA scan be monitored time the complex 1 EHITTA for hest, depreciation and ration SPT primarily is type opoda RHCSA RHP actie solar panels that the company mufacture tale om The products primarily to individual home owners and home builders. The puls conein five different while for sale on residential house of CSP produce solar panels from a Germaniter and sold to the commercial market for en large cabing. For these products SPL acts as a distributor. The panels come in eighties. Both of the building. The company sells all of the core to these panels ypes of products can be madeither when the building is being constructed or any time after the completion SP provides services for installation and consulting Installation is for the products SPI sells Consulting contracts are generally performed for companies looking for cost reduction solutions During 20x9, SPI entered into the following contracte 1. On 16 March, SPT signed a contract with Sharon Co. for a total of St million. Sharone was building a new addition to its manufacturing facility and fuas decided to install solar panels to reduce its annual operating electricity costs. The contract price includes the CP2 solar panels, installation a two-year warranty, and a five-year maintenance agreement that starts as soon as installation is completed. Separate selling prices for the panels and installation and a one-year maintenance contract are $3.200.000 for the panels and installation and $300.000 each year for the maintenance contract Generally, the panels can be installed within four months of the date the contract is signed. A nonrefundable deposit of 10% of the contract is due on signing. Another 755 is due on delivery and installation. The remaining 15% is due six months or later after the installation date when all deficiencies have been resolved. Delivery and installation was completed on 31 August 20X9. The warranty is for assurance that the product will work within its specifications SPI estimates that based on past experience, warranty costs will be approximately $150,000 on this size of contract. The company has recognized $3.4 million in revenue for 20X9. 2. On 5 May, SPI entered into a contract with Bakers Builders Inc. to supply RHP-1 panels. Bakers is a home builder that is currently building 3.000 homes that are energy-efficient. However, Baker does not want to take delivery until the panels are needed. Baker has agreed to be invoiced for all of these panels but will ask for delivery at different points in time for the next eight months. The total contract amount of $6.000.000 was invoiced to Baker on 15 May and Baker paid the full amount on 18 June. The panels specific to Baker's requirements are ready for delivery and have been set aside in a separate part of the warehouse. It is expected that there will be still 15% of the panels left to be delivered by the end of SPI's fiscal year-end, The company reported revenue of $5.1 million related to this contract in 20X9. 3. On 8 September SP't entered into a unique agreement for the sale and installation of CSP-2 panels on the building of a local restaurant. The restaurant's owner, Fred Mason, is planning to sell most of the electricity generated by the panels back to the grid. As he currently does not have the cash flow to finance the upfront cost of the panels and installation, he has proposed that SPI receive an upfront payment of $50,000 when the panels are installed. The remaining amount will be paid as Mason receives credit for selling an excess power back to the grid for the next 24 months. Mason has proposed that he pay SPI 30% of the credit received from the power company. The amount would be determined monthly and immediately remitted to Spt for a period of two years from the date of installation. The normal selling price of this installation would have been $100,000, and management believes that this contract may yield $120,000 or more ever the two-year period, although it has no history to support these estimates. The installation was completed on 10 October and the two-year period commenced on this date. SPi recorded a sale and related receivable of S120,000 in October. To date, SP1 has received from Mason the upfront payment of $50,000 and a total of $5,700 from the sale of power back to the grid which was recorded against the account receivable. 4. During 20X9, SPI entered into an arrangement with Solutions Co. to distribute its RHP-1 product in all of Solutions retail stores. The contract specifies the following: (a) Solutions Co, will have some product on purchase, Solutions will call the order into SPI. Solutions will invoice the customer and be responsible for collection Solutions will be required to remit to SPI on the date of invoice 85% of the sale proceeds; it may retain 15%. SPI will ship the product directly to the customer's home and install the product, if requested by the customer It is now one month before the fiscal 31 December 20x9 year-end. You have just been hired as an accounting manager responsible for the revenue reporting for the company. The CFO has asked you to prepare a memo out- lining how SPI should recognize the revenue from these four contracts during 20X9. Particularly, the CFO wants you to identify the impact on the SFP and SCI and state how this will impact the amount of financing available. Required: Prepare the memo, as requested