Following the trend of naming companies after fruits, Great White North Inc. (GWN), a public company, started a new company called Peach Ltd. (Peach) to break into the cellular phone industry in 2015. Their rst product, the MOne, was a modular cell phone in which customers may buy the base phone for $300 and subsequently purchase modules to customize and upgrade the phone. The idea was that instead of releasing a new phone every year the company would only upgrade modules in which customers could purchase and upgrade the phones themselves. Modules include a swappable larger screen, more memory, and a supersize battery. Unfortunately, the MOne was plagued with technical problems and GWN wanted to shut down Peach and cut its losses. Solving all the technical problems GWN made a nal attempt to make Peach a success by hiring Mr. Holmes as the new CEO. As part of his hiring condition Mr. Holmes had to meet performance objectives for the 2016 2018 years. At which point Mr. Holmes would receive a $5,000,000 bonus if by the end of 2018 Peach's net income exceeded $50 million. As it turned out Mr. Holmes was able to meet all the performance objectives for the 2016 and 2017 scal years. It is now February 1st, 2019. Peach's financial statements for the year ended December 31, 2018 have been received at GWN's corporate offices. Peach's net income for 2018 is reported to be $50,600,000. GWN's CFO has examined the nancial statements and is satised with most aspects of them but is concerned with the reporting of some transactions and economic events listed below. The CFO has asked you, an accountant in GWN'S nance department, to prepare a report evaluating the issues. Mr. Holmes has already called the CFO to arrange a meeting to discuss the financial statements and the payment of his bonus. The CFO wants your report to explain the problem in each issue, identify reasonable alternatives, and provide full support for your recommendations. 1. On July 29, 2018, the company made a payment of $230,000 to a computer programmer who managed to duplicate the computer software that allows the M-One modules to operate with the base phone. The programmer had given the company fourteen days to pay, or she would sell the information to a competitor. Management believed that if the information was obtained by a competitor, it would have signicant negative consequences for the company. Peach has capitalized the amount of the payment and is arnortizing it over the remaining life of the related asset. Subsequently Peach applied for a patent to protect against similar situations from arising in the future. 2. In the last week of December 2018, Peach shipped a $1,000,000 order to a new customer with the new super battery. The customer has been having nancial difficulties, so Peach provided special nancing terms that gave the customer six months to pay instead of the usual 30 days. Payment is guaranteed by the Company that owns the customer. The super battery M-Ones sold came with a six-month warranty, the standard warranty offered to all customers. The order was scheduled to be shipped in early January, but because of an opening in the production schedule Peach was able to complete the order several weeks early. Once the order was completed, it was shipped to the customer. The customer agreed to accept early delivery before Peach shipped a.--\" .-..-... _
