Peach LTD.

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 first

product, the M-One, 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 M-One was plagued with technical problems and GWN wanted to shut down Peach

and cut its losses. Solving all the technical problems GWN made a final 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 fiscal 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 financial statements and is satisfied 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 finance 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 $280,000 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 significant negative

consequences for the company. Peach has capitalized the amount of the payment and is amortizing 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 financial difficulties, so Peach provided special financing 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

the order. The cost of the order was $650,000. The goods were received by the customer on December 31, 2018.

Peach recognized revenue when the goods were delivered, as it normally does.

3. In late January 2019 one of Peach's customers filed for bankruptcy, which Peach had suspected might occur

because the customer was already four months behind on payments. Peach's management thinks it's very unlikely

that it will collect any of the $75,000 owed by the customer. Peach has not adjusted the financial statements for

the event but there is a note describing the event and its impact.

4. Following a review in December 2018 of the useful lives of the M-one production facility, management

extended the life of Peach's production facility and some of its equipment. Mr. Holmes claims that given the

success of the M-One the product life for the M-One is now longer than expected so therefore it was natural to

also extend the life of the production facility. The change reduced the depreciation expense in each of the next

four years by $28,000.

Hints:

The following questions may provide you some guidance as you work through the case:

An explanation of your role (what are your objectives).

Identification of who will be preparing the financial statements and a description of what the preparer's

objective of financial reporting is. Identify any conflicts between you (or your client) and the preparer.

Identification and explanation of any constraints.

For each accounting issue you should:

o Identify what the issue is.

o Explain the impact of the accounting method used in the financial statements on your client.

o Identify the criteria, principles, standards, concepts, rules, etc. that you will use resolve the

problem.

o Apply the criteria, principles, standards, concepts, rules, etc. to the facts that describe the

accounting issue. Explain whether the accounting treatment used by the preparer is consistent

with the criteria, principles, standards, concepts, rules, etc. and explain how any alternative you propose is consistent with the criteria, principles, standards, concepts, rules, etc.

o Make a recommendation and explain how your recommendation serves your client's interests.

Discuss the quantitative implications of your recommendations