HomeSqaured (HS) was established in 1995 as a manufacturer and wholesaler of finished building products for home builders/developers. Examples include, windows, doors, and flooring. It has quickly become a respected company and well known for its creation of highly durable, eco-friendly building products for homes. In 2015, HS became a public company and got listed on the TSX. At the same time, it also started to distribute products to retailers. During 2020, HSs operations began to experience cost overruns that resulted in the companys second-quarter earnings missing analysts forecasts for the first time since it was listed on TSX. Concerned about this trend, HSs Board of Directors decided that bonuses for management would only be given if the companys return on operating assets (calculated as net income divided by total non-current assets) increased substantially by fiscal year end.

It is February 12, 2021. You, the chief accountant, are a key person involved in preparing the annual financial statements for the year ended December 31, 2020. The new CFO Chief financial officer- has asked you to prepare a report to discuss the appropriate accounting treatment for each of the following events that took place in 2020. You are also required to state any impact that your recommendations will have on net income and net assets in the report.

1. The company has been having a lot of difficulty in preparing its financial statements for release to the public. So much so that its Statement of Cash flows (SCF) is not completed and therefore cannot be audited by the auditors. The new CEO, who has a lot of experience in European housing, says to release the statements except the SCF. If we do not release our other financial statements on time then it will look bad on our company. Moreover, the SCF are not audited yet so cant be released. Why mention something that is not even included in our annual filings. (approx. 5 marks)

2. After the third quarter financials were released, the CEO had asked if anything can be done to improve the bottom line for 2020. The CEO cited that the Board of Directors would like to put up for sale some of the companys long-term assets. Prices were set so that there would be an accounting gain on sale. The CEO also said that we are currently involved in a $1,200,000 contract to manufacture pre-finished flooring and it is 75% complete by December 31, 2020. These pre-finished flooring items are made very often by the company but are still subject to approval by the buyer when completed. The long-term assets that were sold had a carrying value of $340,000 and consideration received of $400,000. There have not been any revenues or costs recorded for the flooring contract. However, the asset sale difference between carrying value and consideration was put to revenues on sales. (approx. 10 marks)

3. HS is confident that sales of its new triple pain (3 pieces of glass per window) windows will bring it back to its regular level of profitability. These triple pain windows are more energy efficient and offer better security. Retailers of these windows are enthusiastic about buying these windows. So much so, that one large chain ordered 5,000 custom windows for a contract price of $500,000 (costs to produce will be 75%) and made a 10% deposit. The customer will be invoiced as the order is completed and the windows are put into a separate section of HSs warehouse and tagged with the customer name. But the windows will not be delivered until requested by the customer in the new year. The 5,000 windows were fully completed by December 31. The full amounts were booked to revenues and costs. HSs bad debts expense has traditionally been less than 1%. (approx. 8 marks)

Required: (Total 30 marks) Prepare the report to the CFO. Your report should:

1. Identify major forces (e.g., users and their needs, constraints and management bias, etc.) that may affect HSs financial reporting objectives. Be sure to keep your answers case-specific. (4 marks)

2. Discuss and recommend to the CFO how each event should be accounted for. Be sure to also discuss financial statement implications (to the extent possible, specify numerical effect, and any journal entries). If the company has violated any accounting principle(s), identify the principle(s) violated and explain the nature of violation. (~23marks).