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Create memo of the financial reporting issues for a firm using IFRS and private but looking to go public neral:Pretax earnings for the period ended
Create memo of the financial reporting issues for a firm using IFRS and
private but looking to go public
neral:Pretax earnings for the period ended April Year were $ For the fiscal years Year Il and Year RSI recorded prete earnings of $ and $ respectively.Marge Roman has received a valuation report valuing the company at $ million. Shareholders' equity as at April Year consisted of common shares at $ and retained earnings of $New Software:The company has been using a standard general ledger software package originally installed in Year by a local computer consulting firm and upgraded annually.In January. Year RSI hired BBC to oversee the implementation of a new thirdparty package. In March, Year RSI began converting its financial reporting system. The new general ledger software was installed in parallel with the old software and went live on April Year The new general ledger software has been used to generate RSI's financial results since April Year Starting July Year the old system will no longer be used in parallel.To date, RSI has been invoiced $ by BBC These costs have all been capitalized in the April Year financial state.ments. The invoices show the following services and costs:Initial review and recommendations $Cost of new software $Implementation cost $Training work $Monthly support fee April $Other consulting fee to April $In addition, as at April Year RSI also capitalized $ related to the salaries of four employees who have worked on the accounting software project since January Year Because these individuals were pulled out of their regular jobs to handle the prob. lem, RSI had to hire two additional emplovees.The costs will be amortized beginning on July Year on a straightline basis over three years. RSI intends to treat approximately $ of the carrying amount for the old software as part of the cost of the new software by reallocating this balance.Revenues:During fiscal Year total product revenue was $ million and maintenance contract revenue was $ million. For the period ended April, Year product revenue was $ million and maintenance contract revenue was $ million.RSI recognizes product revenue when shipment and installation take place. It is RSI's standard practice to request a customer signoff for any installation work. The installation crew normally gets signoff on the day of installation. During interim work for fiscal Year it was noted in the audit file that approximately $ of revenue recognized in April, Year related to work installed and invoiced in April, but customer signoff was obtained only in early May. Such situations did not catch anyone's attention in previous years. RSI explained that it recently hired new service technicians who were unfamiliar with the policy of customer signoff, and accordingly had to send technicians back to the client days after the installation was completed to get the signoffs.Maintenance contract revenues relate to oneyear agreements that RSI signs with customers wanting product support. During the year, the company changed its revenue recognition policy on maintenance contracts to recognize revenue based on estimated costs incurred on the contract. Revenue is recognized as follows: in each of the first two months of the contract and in each subse quent month. This allocation is based on a study done by RSI in Year which showed that the costs incurred on the contracts aremostly incurred in the first two months, during which R$I sends out a technician to perform preventive maintenance. The preventive maintenance reduces the number of future service calls and, therefore, overall costs.ABM Business:As a result of RSI's strong relationship with its financial institution and Marge's desire to diversify RSI's product line, RSI began selling automated bank machines ABMs in fiscal Year The machines are purchased from a large electronic equipment manufacturer responsible for ongoing maintenance of the ABMs. RSI sells the ABMs to restaurants, bars, and clubs at margins of The sales revenue is included as product revenue.The standard ABM sales agreement states that for a threeyear period from the date of sale, RSI receives of the transaction fee charged to customers using the machine in addition to the sales revenue. A further of the fee is payable to the financial institution for managing the cash in the machines, and the remaining is remitted to the machine owners. The transaction fee charged to customers using an ABM is normally $ and is set by the financial institution. RSI is not responsible for stocking the ABM with cash or emptying the cash machine. The financial institution performs all cash management duties and remits to RSI, at monthend, a statement showing money owed to RSI for its share of the transaction fee. A day later, the funds are deposited directly into RSI's main bank account.A total of ABM transactions were processed in Year for a total fee of $ RSI has booked transactionfee revenue of $ and an expense of $ related to the fees, attributable to the financial institution and the machine owners.debentures:In January, Year RSI needed longterm financing and issued to a thirdparty venture capitalist $ of debentures maturing years, with interest at The debentures are included as longterm debt in the accounts. The debentures are convertible at the ption of the holder, at a rate of one voting common share for every $ of debenture, if RSI issues shares to the public. If RSI does not sue shares to the public before June Year the debentures are repayable upon demand.Accounts Receivable:Review of the aging of accounts receivable at April Year showed an amount of $ in the overday category. According to RSI's collection department, the balance relates to payments withheld by one of RSI's largest customers. Mountain Bank. RSI had contracted to install security cameras at all of its branches. The work was performed in August, Year a customer signoff was received at each branch, and invoices were sent in early September. Mountain Bank refused to pay individual invoices. It wants to pay the total of all invoices in one payment.In October, Year a few branches of Mountain Bank contacted their head office and requested that no payment be made to RSI until certain corrections were made to the angles at which the cameras were installed. Although not required to do so under its agreement with Mountain Bank, RSI fixed the problems, as Mountain Bank is one of its largest customers.On June Year $ was received. Mountain Bank asserts that some work remains to be done at to sites and is withholding final payment until it is completely satisfied. All amounts related to the contract are recorded as revenues. Internal reports reveal that it takes a service person approximately one hour to fix the problems at each branch. No significant materials costs have been incurred for the followup visits.
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