Senior Management Meeting

Instructions: In this case you are the CFO of BWC, a company based in Wilmington, NC (if this is done as a team exercise, you may assume any of the following roles: CFO, Controller, VP, or CEO.) The meeting takes place after Hurricane Florence, which has done some damage to your HQ in Wilmington, NC.

This is a normal end-of the-quarter meeting where you are about to discuss some accounting issues as they relate to your previously announced earnings guidance given to Analysts and Investors (hereafter referred to as the market) and your current end-of quarter financial situation. Specifically, three months ago you have communicated to the market that your quarterly earnings per share (EPS) would be 90 cents. However, upon closing the books, it is obvious that you are short since after the first set of adjustments, the preliminary financial statements show 60 cents per share. Obviously, this is an uncomfortable situation since not meeting the 90 cent EPS number will cause the stock price to decrease by at least 30 percent, something that you would like to avoid, if possible.

Analyze and critically evaluate each situation and develop an appropriate strategy using various accounting techniques, appropriate accounting standards, legal and ethical decision making, to reach the 90 cents based on the scenarios/discussion items below, if possible to complete a reconciliation, which shows what adjustments you want to make. Please be careful in how you adjust the numbers as some items are already included in the 60 cents and some are not.

1. Included in the 60 cents is a charge for hurricane related damage related expenses. The controller added 5 cents to cover possible expenses resulting from hurricane Florence. The extent of the damage has yet to be decided with reasonable certainty.

2. Annual maintenance is 8 cents per year. You deferred (postponed) 2 cents of maintenance last quarter even though the previous quarter normally is the heaviest maintenance quarter of the year. Therefore, the current quarter includes 4 cents of maintenance, 2 cents of which relate to the previous quarter.

3. Extraordinary (not normal) maintenance was another 8 cents, all of which was charged to the current quarter. While it is uncertain if the extraordinary maintenance will prolong the life of the machinery, the senior engineer in the company feels that overall maintenance will be reduced somewhat in the coming two years.

4. You have decided to donate 100,000 hectares of land to the Save-the-Bird Foundation in Belize. The land will be donated over a five-year period in equal installments, resulting in a 1 cent per year per share EPS increase.

5. You purchased heavy equipment this quarter. The normal company policy is to charge half a year depreciation expense in the year of acquisition. This means that the current quarter's EPS includes 2 cent of depreciation expense. This is independent of item 15 below.

6. In the previous quarter you purchased a competitor at a price, which exceeded its market value. The plan was to write off the excess acquisition price over the next four quarters at 3 cents per quarter. The current quarter includes the write-off.

7. In reviewing the accounts receivable you find that from a historically perspective, each quarter includes a 2-cent charge of additional bad debt expense. However, you also note that accounts receivable balances have decreased over the past year, which has resulted in an unusually high bad debt expense this year based on historical percentages.

8. BWC moved its European HQ from London (UK) to Amsterdam (Holland) as a cost of 6 cents per share, all of which was charged to the current quarter.

9. The Senior Vice-President of Sales mentions that he can ask one of the major customers to place a larger order before the of the day. If the order is placed, it will be delivered in two months FOB Shipping Point increasing the earnings be 2 cents a share.

10. In the very beginning of the current quarter, BWC initiated an advertising campaign which would last 6 months. The estimated cost of the advertising campaign was 6 cents per share, all of which was included in the 60 cent EPS number. The Marketing VP estimates that most of the increase in revenue resulting from the campaign would take place in the next quarter.

11. The company has a 4 cent per share unused general rainy-day fund that is currently unused. The four cents have not been used in the past year.

12. BWC is currently a party to a law suit, which it lost in non-binding arbitration. The company is appealing the verdict. It has not reserved anything to cover the potential losses, about 2 cents per share.

13. The company has 4 cents per share in unearned revenue on the books. The company estimates that is has completed 50 percent of the work has been completed and estimates the earnings process will be complete within the next six months.

14. At the very end of quarter, a customer placed a larger order, which would amount to 2 cents per share in earnings if recognized this quarter. The customer requested delivery of the items one day after the end of the current quarter. It's unclear if the order is FOB Shipping point or FOB Shipping Destination.

15. The company normally depreciates its machinery using double-declining balance. A switch to straight line would yield a cumulative adjustment (to income) of 8 cents per share.

Required: analyze each of the independent items and determine the change in accounting treatment, if any. Motivate your decision! Produce a reconciliation showing the adjusted EPS number that you are willing to present.