Provide Anita with a memo discussing the accounting issues identified in Appendix I.

Accounting issues (APPENDIX 1)

Wooden bicycle segment

Restructuring during the fiscal year led to the decision to discontinue the wooden bicycle segment, on November 20, 2019. This segment represents a major line of business. Relevant information about this decision is as follows:

The segment incurred a loss of $283,500 for the year.

Estimated costs to dispose of the segment are $300,000. A broker has been hired for the transaction and the assets of the segment are currently advertised at prices that reflect WTIs best estimate of fair value.

At the time the board decided to dispose of the segment, the fair value of its property, plant, and equipment (PP&E) was estimated to be $7 million and the carrying value of PP&E was $7.9 million. When this analysis was performed, management was surprised to find that many fixed asset acquisitions over the past couple of years were not prudent. Some assets had been purchased at excessive prices and others had been utilized far below capacity.

Carrying value of current assets and all liabilities were equal to fair value. Fair value estimates did not change between November 20 and December 31.

The income tax rate for WTI is 30%.

WTI wrote down the PP&E to $7,000,000 in the 2019 financial statements. The $900,000 loss is reported under other income and expenses on the income statement.

Fire damage

On February 1, 2020, a fire broke out in one of WTIs manufacturing buildings. By the time the fire was contained, there was significant property damage and some manufacturing assets were unrecognizable. WTIs management has spent considerable time trying to figure out what was lost in order to quantify and support a claim for insurance purposes. Nothing has been reflected in the 2019 financial statements because the event occurred well after year end.

Depreciation

During December, when depreciation expense was being calculated, it was discovered that several manufacturing assets had been coded to the wrong general ledger account by the accounts payable clerk in the prior fiscal year. The assets had a total cost of $100,000 and, based on being coded as furniture and fixtures, were being depreciated straight-line over 10 years. WTI claims a full year of depreciation in the year of acquisition.

After detecting the issue, management recorded depreciation expense of $30,000 on these assets in 2019 because manufacturing assets should be depreciated straight-line over five years at WTI. This means the cumulative depreciation is now $40,000, as required, and the assets are reported at net book value of $60,000. As changes in depreciation are treated as changes in accounting estimates, the change was made prospectively and there was no need to adjust the prior period financial statements.