I am reviewing the response to the computer commodity, inc. case and question 1 regarding materiality asks for estimate amount. any way to help me with that?

Part I: Materiality Required: Using information from your auditing textbook, estimate overall materiality for the fiscal year ended June 30, 2016. What is the magnitude of misstatement that you believe would be material to a financial statement user? Solutions: Materiality as a concept is very important to refer in parlance of auditing and financial statement reporting. The material concept should be followed while transcribing the accounting and business related information in the financial statement. The management of the entity / company has the responsibility to confirm that, the relevant material information presented in the financial statement are correct. It is also fact that, when material information avoided to disclose or misstated materially, the financial statement will not represent a true and fair view of the company's financial condition. From the information provided in the case, we may sense that, the company is in need of funds that need to be financed to grow the business. We have seen that till date, it has funded with promoters own resources. When we look at the financial statement ended June 30, 2016, we could observe that the apart from the equity financing, the company also uses accounts payable and advances from customers towards financing its requirements. From the given information, we may assume that, the management of the company using the short term funds like accounts payable and advance from customers for long term purposes, which will squeeze the liquidity position of the company and this information need to be disclosed in the financial reporting and should be mentioned in the notes to accounts by the auditor in the process of auditing for the FY ended June 30, 2016. If these details are not provided, then the information disclosed in the annual report may mislead the stakeholders. If this information of using short term funds for long term purposes are not disclosed, it will show a wrong picture of the financial position of the company and the magnitude of this presentation would be huge and it may force the company to file Insolvency because of its debt burden. So we assume how big the magnitude of scandal because of the mis-presentation in the financial statement. Part II: Terms of Sale Required: a. Prepare a one - two page memo for Susan Madigan explaining the appropriate accounting treatment now that CCI has chosen to give its customers an extended return period and price protection all shipments. If any adjustments are necessary, propose an appropriate adjusting journal entry. Ans: Adoption of an appropriate revenue recognition method to record the sales is very important. Here as we could observe that till data, CCI has been following sales method only. As per Sales Basis method, the said revenue is recognized at the time of sale, which may be defined as the moment, in a situation where goods or services is transferred to the purchaser. The revenue generated may be in form of cash or credit indicating that, the revenue is not only recognized by getting the cash. As per the past track of revenue recognition of the company, the model has been adopted for the fiscal year 2016 was not adopted earlier. Now to goof up sales figures, the company is adopting this practice of increasing the returns periods and calculating the estimated returns to 90 days and calculates the incentives accordingly. The problem is that, when the return period have proposed to be increased from 30 days to 90 days, it becomes extremely difficult for the company, if there is no proper collection mechanism. As a result, there will more receivables uncollectible leading to bad debts and company may have to provide provisions in the next fiscal year. Hence as a process keeping the past track and it should be ensured that, there is an allowance account which need to be debited for the sales made towards the incentives. As per the industry practices, we should only record transactions, which executed and we may pass the journal entry accordingly. It is not possible to record the transaction on estimated inventory and estimated price concessions. We may have to reverse the entry towards the allowance debit on sales and potential liability generated on incentives. We may treat the entire transaction of incentive like offering discount on sales along with credit sales. which may be as follows: Accounts Receivables (Debit) Sales (Credit) (To record the sales, sold on credit) Cash Sales Discounts Account Receivable (Debit) (Debit) (Credit) (To record collection of receivable with discount) b. Separately address whether it is possible to determine if your conclusion is correct. Explain why or why not. Ans: It should not be permitted to the management of the company to inflate the sales by offering high returning days, which may not support the business model. The practice should be always towards a conservative approach towards the revenue recognition. The process of revenue recognition differ from one business model to the other, but in this case, we may say that, we cannot calculate incentives on estimated inventory and pass the journal entry. Hence we should restrict the company debiting the allowances and crediting the potential incentives. All this against the materiality concept. c. Separately address whether it may be possible to reach different conclusions about the appropriate financial accounting for this transaction. Ans: With respect to appropriate financial accounting for these transactions, it is not possible to have different conclusions. It is very simple that, all journal entries passed should be on the sales recognized not on the estimated ones. d. If it is possible that there are different conclusions, does this mean that one conclusion is correct and that the others are wrong? If not, is one opinion better than the others? If you go down this later path, explain what you mean by a better conclusion. Ans: There are no possibilities of different conclusions and we may not say that, one conclusion is different from the other. In the terms of accounting, the accounting standards remain the same and hence there is only on conclusion. The opinion may differ from different prospective. A better conclusion in this regard will be , the incentives or discounts offered need to be provided on the sales recognized and the incentives should be calculated on the actual sales. There should not any concept of estimated concession and estimated inventory. Part III - Exchange of Inventory for Barter Credits a. Prepare a one page memo for Susan Madigan explaining the appropriate accounting treatment for the sale of inventory to Sterling Vendors. Your memo should include a journal entry to book the transaction as of June 25, 2016 with supporting logic. Ans: With respect to record the transaction of selling the old inventory, we may say that, the amount to be recorded should be market value or book value of the inventory, whichever is lower. But if the inventory is sold more than the book value, then it needs to be recorded as gain on sale of inventory. Here we understand that, the management is selling the inventory to the broker for $9 Million, whose actual price is $8 Million and getting the service credit for the same . Hence following may be journal entries (1) Accounts receivable (Debit) $9 Million Services Credit (Credit) $9 Million (2) Services Credit (Debit) $9 Million Sales (Credit) $ 9 Million (3) Inventory (Debit) $8 Million Gain on Inventory (Debit) $ 1 Million Accounts Receivable (Credit) $9 Million We need to record the gain on profit on the inventory and have to credit to the service credit at the year end. We got to transfer the services credit to the sales at the year end. These transactions may be noted in the notes to the accounts for better representation in the financial statement. b. Separately address whether it is possible to determine if your conclusion is correct. Explain why or why not. Ans: Generally this nature of transactions is not permitted and we should also understand why the performance needs to be executed by clients of Sterling Vendors. This kind of transactions do not actually generate revenue for the company, rather it accommodates all transactions executed by company. Here we may intended to say that, this transaction is made by the management , in order to gain on the old inventory, which actually should be have shown at the book value. It may be better to sell the old inventory to traditional customer for $5.50 Million. c. Separately address whether it may be possible to reach different conclusions about the appropriate financial accounting for this transaction. Ans: In this case the conclusion may be different when we understand how the service credit is getting utilized and to what extent it need to be used. Is it like the entire service credit need to be completed by the next fiscal year or it also can be permitted to spill over to the next to next fiscal year. Hence accordingly the financial accounting treatment changes. d. If it is possible that there are different conclusions, does this mean that one conclusion is correct and that the others are wrong? If not, is one opinion better than the others? If you go down this later path, explain what you mean by a better conclusion Ans: As discussed above, in such a transaction, the conclusion may differ by understanding the terms and conditions to use the service credit. As per me , the better conclusion would be , to sell the old inventory to the traditional customer and book the loss , if the terms and conditions of the Sterlling Vendors are not favorable to CCI