FiveAm Club Incorporated (FIVEAM) is a manufacturer of exercise equipment such as treadmills, stair climbers, and elliptical machines. The company has a December 31 year end and uses ASPE.

This was a year of mixed results for FIVEAM. On the one hand, FIVEAM got a boost from the pandemic as now people wanted to buy exercise equipment for their homes. On the other hand, FIVEAM suffered a significant loss of the business that it used to have from gyms as gyms stopped ordering new equipment altogether. Unfortunately, FIVEAM’s production lines have been set up to mainly produce heavy-gym equipment not suitable for a personal gym. Also, FIVEAM’s production lines were completely shut down for five weeks in March and April due to the pandemic. FIVEAM applied for special support program available through the Fitness Association of Canada. The Association was able to provide a grant to FIVEAM to cover up to 40% of their employees’ salaries during the 5 weeks period and also allowed FIVEAM to borrow the remaining 60%. The Association requested FIVEAM’s 2020 year-end financial statements which it will be reviewing to see if FIVEAM made more than $100,000 in 2020 (if yes, the grant becomes repayable). The Association will also be evaluating the Salary line item on the financial statements to ensure that it’s “reasonable”.

When FIVEAM’s production resumed, employees were asked to work over-time without additional pay. However, management promised that if FIVEAM made more than $500,000 in revenues this year, all employees who worked over-time would get a bonus. Management promised to make “some” FIVEAM’s financial data available to the employees at the end of the year and to be “transparent”.

Lawsuit

This year has also been not easy for management because of the company’s first lawsuit. FIVEAM had no previous lawsuits as management takes pride in the quality of the product. However, the new lawsuit alleges that the company’s equipment was the cause of a ‘major injury’ at a gym where the equipment was installed. FIVEAM’s lawyer says it’s a ‘messy’ lawsuit as the injury occurred at a gym where there might be many other factors contributing to the injury. Therefore, the lawyer is not certain that FIVEAM will be found guilty if it’s taken to court but he did suggest to management to settle the lawsuit to avoid bad publicity.

New Factory

To meet the growing demand of personal gym equipment, the company completed construction of a new plant in Saskatchewan on December 15, 2020. FIVEAM owns the land on which the plant was built and it was purchased $400,000 at the beginning of the year. The building cost $2,500,000 to construct and management estimates that it will be in use for 30 years (at that time, the residual value will be only $70,000). Management purchased some furniture necessary for operations in the plant for $250,000. FIVEAM had to borrow some funds to finance the project and paid $75,000 in interest from the inception of the construction project until it was put in use.

New equipment

FIVEAM purchased a high-efficiency computer and a 3D printer at an auction for $10,500. The printer needed a new drum. The cost of the new drum was $8,500. The used computer's fair market value was $8,000 if purchased separately. The printer was worth $9,000 without a drum and $9,500 with the drum replaced. On July 1, 2020, FIVEAM sold a delivery truck for $10,000. The truck originally cost $25,000, and accumulated depreciation on the truck to December 31, 2019, was $10,000. The truck was amortized on a straight-line basis over a five-year period, with no residual value. No amortization was recorded in the current year.

Asset Exchange

Due to a redesign in the Ontario building, FIVEAM traded some old equipment for different equipment with a similar life and value in use. The fair value of the equipment disposed of was $5,000. The cost of this equipment was $7,000, and the accumulated depreciation on the equipment at December 31, 2019, was $3,000. This transaction was not recorded in the books of account. No entry was made to record the exchange. The fair value of the new equipment is $5,500. Some team members state that they feel ‘happier and therefore more efficient’ using this equipment given that the equipment looks more modern.

Factory damage

Shortly after the new factory was completed, vandals attacked the building and caused significant damage. The costs to correct the damage, which were not covered by insurance, included new paint to cover graffiti $ 4,000, glass for broken windows 10,000 and improved security system 25,000.

Research and Development

During the year, the company developed a new piece of exercise equipment that has a built-in video game. It was the policy to amortize development costs on a straight-line basis over three years, with 50% of the normal amount in the year of development. FIVEAM incurred $100,000 in costs to determine how a video game would work with exercise equipment; $700,000 in costs to design, test and construct prototype equipment; $80,000 was spent to determine the best production process for the new equipment. Management believes the equipment will be a hit and spent only $47,000 to alert customers about the new product.

Goodwill and intangible

The company has goodwill and an intangible asset recorded on the balance sheet. At the end of last year, the goodwill balance was $500,000 (with no accumulated amortization associated with this account). The goodwill was originally recorded in 2015 when the company took over the business of its predecessor. Goodwill has a recoverable value of $700,000 as at December 31, 2020. At the end of last year, the customer list balance was $250,000 (gross value not considering the accumulated amortization). The intangible asset was originally recorded in 2015 as well and was being amortized over 10 years. However, this year it became apparent that the customer list has lost value and will not provide benefits through to 2025, as was originally predicted. It is now expected to provide undiscounted future cash flows of $50,000 in total over the next two years. There are no estimated costs to sell the list, as it will not be sold, and the value in use is $46,000.

Case questions

Answer the following questions and when applicable discuss the impact on financial users’ reporting objectives and needs. Use appropriate criteria in your discussion when applicable.

1. Identify and discuss major users, reporting objectives and constraints.

2. Determine how to account for the funds received from the Fitness Association of Canada. Please explain.

3. Determine the implications of the lawsuit on the financial statements, if any.

4. Determine whether the expenditures related to the new plant should be capitalized or expensed. Be sure to provide any appropriate criteria, evaluate the criteria using case facts and conclude on the issue.