The Mysterious Case of the Loaded Leprechaun

The Loaded Leprechaun (hereafter, the Leprechaun) is a popular chain of Irish-themed restaurants with locations in tourist hotspots across the United States, including Boston, Chicago, Denver, Las Vegas, New York, Orlando, and Seattle. The Leprechaun bills itself as ''America's Greatest Brew Pub'' and specializes in excellent steaks and six varieties of beer that are brewed in-house at each location. The Leprechaun has been owned and operated as a private company since its founding in 1948 by the O'Shaughnessy family of Boston, MA. One of the great traditions at the Leprechaun is the ''Dollar Holler.'' Patrons personalize dollar bills by writing a message or drawing a picture with a permanent marker and then staple the dollar to the ceiling, wall, banister, or any other available surface in the restaurant (see Figure 1). As each dollar goes up, the employees let out an appreciative yell. Patrons supply the dollar bills themselves, although the wait staff will make change for customers who need dollar bills. Each customer is allowed to place as many dollar bills as they like on the walls, and most place at least one dollar bill on the wall per visit. Over the years, this tradition has grown in popularity, and the O'Shaughnessy family estimates that the average restaurant has accumulated more than $1 million in personalized dollar bills. The dollars are not regularly counted, and the wait staff does not participate in any accounting for dollar bills, other than by asking that customers not remove existing dollar bills (a problem that the company frequently encounters). Historically, the company has prepared cash basis financial statements for internal use. However, Bridgett O'Shaughnessy (the founders' granddaughter) has recently obtained control of the company and is considering taking the company public in order to pursue an aggressive, nationwide expansion plan. As part of this process, she has employed your firm to make a set of financial statements in accordance with U.S. GAAP. Preparation of the financial statements is relatively straightforward, with the exception of the accounting surrounding the dollars the company receives from customers as part of the ''Dollar Holler'' tradition. Management has previously ignored these dollars for accounting purposes.

Legal Issues

1. Writing on U.S. currency with a marker could be considered an action that defaces the bills. Does the ''Dollar Holler'' tradition result in defacement? Are the dollar bills the Leprechaun receives still legal tender?

Financial Accounting Issues

2. How should management initially account for these ''Dollar Holler'' dollars? What specific journal entries, if any, should the company record when the ''Dollar Holler'' dollars are received?

3. How should the company account for theft losses following the initial receipt of the ''Dollar Holler'' dollars?

4. How should the company report the receipt of the ''Dollar Holler'' dollars in the financial statements?

Tax Issues

5. How should the company report the ''Dollar Holler'' transaction for federal income tax purposes? Consider that while the role of a tax accountant/adviser is to be an advocate for the taxpayer, professional standards require consideration of evidence in support of and contrary to the desired conclusion.

6. Assuming the company is organized as a C Corporation, where would the company report the ''Dollar Holler'' transaction on its federal income tax return? (Instructions for tax returns are useful in this compliance function.)

Business Law

Facts

This section details all of the relevant facts on the questions raised, including background information, parties involved, dates and other pertinent information.

Issues

This section describes the legal question arising out of the client's case or transaction. It could be a single question on a point of law or multiple paragraphs containing questions on multiple points.

Authorities

This section provides citations for the relevant tax authority that applies to the issue(s), including both authority inconsistent with and authority consistent with the conclusion.

Conclusion

This section summarizes the overall issue, states the laws and rules applicable to the issue, and concludes with recommendations.

Analysis

This section contains the main body of the legal memo. The relevant legal sources should be clearly applied to the facts of the case or transaction. The applicable laws, rules, legislative guidelines, and court cases should be cited. The analysis should be conducted in a neutral manner, and relevant law sources for and against the conclusion should be presented

Financial

Background

This section introduces the reader to key facts and issues in the case. The focus should be on clearly and concisely summarizing the relevant facts and the key issues from the case. What is at issue? Why is it important?

Initial Recording of Dollar Holler Dollars

This section discusses the initial recording of the Dollar Holler dollars into the accounting system. The focus should be on clearly and concisely summarizing relevant authoritative guidance and describing how the guidance relates to the case facts identified above. Any important assumptions and their effects on your recommendation for the initial recording of the Dollar Holler dollars should be clearly noted.

Subsequent Journal Entries

This section discusses whether the Loaded Leprechaun should record any journal entries

subsequent to the initial recording of the Dollar Holler dollars into the accounting system. Again, the focus should be on clearly and concisely summarizing relevant authoritative guidance and describing how the guidance relates to the case facts identified above. Any important assumptions and their effects on your recommendations regarding subsequent journal entries should be clearly noted.

Reporting of Dollar Holler Dollars

This section discusses how the Loaded Leprechaun should report the receipt of the Dollar Holler dollars in the financial statements. You should consider presentation and disclosure issues from the perspective of the income statement, balance sheet, and statement of cash flows. Again, the focus should be on clearly and concisely summarizing relevant authoritative guidance and describing how the guidance relates to the case facts identified above. Any important assumptions and their effects on your reporting recommendations should be clearly noted.

Tax

Facts

This section discusses the facts related to the tax issue and provides a description of the transaction necessary to develop an answer to the tax research question. This discussion should be brief and focus only on the characteristics of the transaction that are relevant for tax purposes.

Issues

This section states the tax research issue addressed in the memo and summarizes the research question in a specific and concise manner. More than one issue is possible.

Authorities

This section provides citations for the relevant tax authority that applies to the issue(s), including both authority inconsistent with and authority consistent with the conclusion.

Conclusion

This section briefly states the conclusion to each issue, providing support for the answer when possible. The conclusion should state how the Dollar Holler transaction should be reported for federal income tax purposes and where the transaction should be reported on the federal income tax return.

Analysis

This section should provide a clear understanding of the general area of tax law related to the issue and analysis of how the issue is impacted by specific tax authorities. The discussion should apply these authorities to the transaction and explain how the authorities lead to the proposed conclusion. This section should also include discussion of the impact of alternative organization form of the Loaded Leprechaun

Questions for tutor:

what codification/law/statute is relevant for

1. financial reporting
2. tax reporting
3. business law