There is a case question (very last question) in the document below and i would like to know how to resolve it properly

University of Toronto Faculty of Arts and Science and Rotman School of Management RSM 220 H1F - Financial Accounting Final Examinations, April 2013 Duration: 3 hours Aids allowed: Hand-held, battery-operated calculator Please answer all questions on this exam paper (or in booklets, etc.) 8 questions - you must answer ALL questions. The exam consist of x pages FIRST NAME: ___________________________________________________________ LAST NAME: ___________________________________________________________ Student #: ___________________________________ Question Grade 1 2 3 4 5 6 7 /22 /31 /10 /7 /11 /23 /11 8 /65 Total : /180 RSM220H1S Final Exam (Winter 2013) Page 1 of 18 QUESTION 1 - Multiple Choice (22 marks) REQUIRED: Please answer the following questions (2 marks each) by choosing the best answer: 1.Which of the following statements best describes the accounting for intangible assets after acquisition under IFRS? a) They may be accounted for under the cost model or the revaluation model. b) They should be accounted for under the cost model. c) They should be accounted for under the revaluation model if an active market exists for the asset. d) None of the above. 2. Which of the following facts concerning depreciable assets should be included in the summary of significant accounting policies? Amortization Method Composition of Assets a) No Yes b) Yes No c) Yes Yes d) No No 3. Zenox Corp's comparative balance sheets as at December 31, 2012 and December 31, 2011 reported accumulated depreciation balances of $800,000 and $600,000, respectively. Property with a cost of $50,000 and a carrying amount of $40,000 was the only property sold in 2012. Depreciation expense for 2012 was: a) $210,000. b) $200,000. c) $190,000. d) $220,000. e) None of the above. 4.Hopper Company acquired machinery on January 1, 2005 which it amortized under the straight-line method with an estimated life of fifteen years and no residual value. On January 1, 2010, Hopper estimated that the remaining life of this machinery was six years with no residual value. How should this change be accounted for by Hopper? a) As a prior period adjustment. b) As a cumulative effect of a change in accounting policy in 2010. c) By setting future annual depreciation equal to one-sixth of the book value on January 1, 2010. d) By continuing to amortize the machinery over the original fifteen year life. 5.Parry Co. purchased land as a factory site for $500,000. Parry paid $20,000 to tear down two buildings on the land. Salvage was sold for $2,700. Legal fees of $1,740 were paid for title investigation and making the purchase. Architect's fees were $20,600. Title insurance cost $1,200, and liability insurance during construction cost $1,300. Excavation cost $5,220. The contractor was paid $1,200,000. An assessment made by the city for pavement was $3,200. Interest costs during construction were $85,000. The cost of the land that should be recorded by Parry Co. is: a) $520,240. b) $523,440. c) $524,940. d) $528,140. 6.For sale of physical goods, the following condition has to be satisfied for a seller to recognize sales revenue: a. The legal title of the goods has to be transferred from the seller to the buyer. b. The risks and rewards associated with the goods have to be transferred from the seller to the buyer. c. The physical possession of the goods has to be transferred from the seller to the buyer. d. Partial payment has been made from the buyer to the seller. 7.On April 16 2013, a fire destroyed the entire uninsured inventory of a retail store. The following data are available: RSM220H1S Final Exam (Winter 2013) Page 2 of 18 Sales, January 1 through April 15 Inventory, January 1 Purchases (net), January 1 through April 15 Markup on cost The amount of the inventory loss is estimated to be a. $120,000. b. $20,000. c. $100,000. d. $145,000. $500,000 100,000 420,000 25% 8. THW has only one product in inventory, and all units of that product are identical (homogenous). During June, the following changes in inventory took place: June 1 Balance 1,400 units @ $24 8 Sold 400 units @ $50 10 Sold 1,000 units @ $40 24 Purchased 1,500 units @ $30 29 Sold 600 units @ $44 THW maintains a perpetual inventory system. The cost of the ending inventory by the end of June under FIFO is a. $33,600. b. $26,400. c. $21,600. d. $27,000. 9. THW has only one product in inventory, and all units of that product are identical (homogenous). During June, the following changes in inventory took place: June 1 Balance 1,400 units @ $24 8 Sold 400 units @ $50 10 Sold 1,000 units @ $40 24 Purchased 1,500 units @ $30 29 Sold 600 units @ $44 THW maintains a perpetual inventory system. The cost of goods sold recognized in June under average cost is a. $33,600. b. $51,600. c. $54,207. d. $27,000. 10.For consignment sales, when is it appropriate for the consignor to recognize sales revenue? a. When the consignment goods are shipped from the consignor to the consignee. b. When the consignee acknowledges the receipt of the consignment goods. c. When the consignor receives notification from the consignee that the consignment goods have been sold. d. When the consignor receives payment of the consignment goods from the consignee. 11.Inventory is generally valued at the lower of cost and net realizable value (LC&NRV). If the net realizable value is less than the cost, under the indirect method, which of following account should be debited to record the change in inventory value? a.Cost of goods sold b.Allowance to reduce inventory c.Loss due to decline in net realizable value d.Inventory RSM220H1S Final Exam (Winter 2013) Page 3 of 18 QUESTION 2 (31 marks) Part I UCMP Ltd., a technology retailer that sells laptop computers to university students, offers students an \"interest only for 3 years\" financing plan. Under this plan, students only pay interest every 6 months for 3 years (1 st payment is required 6 months from the date of purchase), and then pay the full \"sales price\" of the computer at the end of the 3 rd year; and UCMP charges students an annual interest rate of 12% (compounded semi-annually). According to a recent credit appraisal, UCMP annual effective interest rate is 10% (compounded semi-annually). On December 31, 2012, UCMP sold 5 laptop computers under this \"interest only for 3 years\" plan at a price of $2,000 each. The inventory record shows that the cost of these computers is $1,500 each. Assume collectability of the full amounts (both the interest and principle) is assured. REQUIRED: 1) Prepare all required journal entries to record the sale and costs on December 31, 2012 (under perpetual inventory system). Show all supporting calculations, and round all figures to the nearest dollar. For each component of the journal entries, clearly state whether the entry (dr./cr.) is made to the income statement (I/S), balance sheet (B/S) or statement of other comprehensive income (OCI). For example, Dr. Cash (B/S) $10; Cr. Revenue (I/S) $10. (10 marks) SOLUTION: 1 - Recognize the Sale Dr. Premium on N/R (B/S) Dr. Note Receivable (B/S) Cr. Sales Revenue (I/S) $507 (1 marks) $10,000 (1 marks) $10,507 (1 marks) Calculation of N/R value: PV of sales price = $10,000 x PVsingle sum(n=6, i=5%) = $10,000 x 0.74622 = $7462 (2 marks) PV of interest payment= ($10,000 x 6%) x PVordinary annuity (n=6, i=5%) = $600 x 5.0757 = $3045 (2 marks) N/R value at January 1, 2012 = $10,507 (1 marks) Note: it is \"ordinary annuity\" because first payment is after 6 months (1 period). Marking note: for each account, 0.5 marks are allocated for reasonable account, and 0.5 marks are allocated to identification of I/S or B/S for total of 1 marks. 2 - Recognize the COGS (2 mark) Dr. COGS (I/S) 7,500 (1 marks) Cr. Inventory (B/S) 7,500 (1 marks) 2) Prepare the amortization schedule of the Notes Receivable for the year of 2013 using the effective rate method (8 Marks). SOLUTION: period 06-30-13 12-31-13 CV Opening (A) 10,507 10,432 10,354 10,272 10,185 10,095 RSM220H1S Final Exam (Winter 2013) Cash Received (B)= 10,000*6% 600 600 600 600 600 600 Interest Rev (C)=(A) x 5% 525 522 518 514 509 505 Amortization (D) = (B)- (C) 75 78 82 86 91 95 CV Ending (A) -(D) 10,432 10,354 10,272 10,185 10,095 10,000* Page 4 of 18 8 marks - 1 mark for getting (A), (B), (C), or (D) for each period. 3) Prepare all required journal entries on December 31, 2013 when the interest payment is received. Show all supporting calculations, and round all figures to the nearest dollar. For each component of the journal entries, clearly state whether the entry (dr./cr.) is made to the income statement (I/S), balance sheet (B/S) or statement of other comprehensive income (OCI). For example, Dr. Cash (B/S) $10; Cr. Revenue (I/S) $10. (3 marks) SOLUTION: Record cash receipt Dr. Cash (B/S) Cr. Interest Revenue (I/S) Cr. Premium on N/R (B/S) 600 (1 marks) 522 (1 marks) 78 (1 marks) Marking note: for each account, 0.5 marks are allocated for reasonable account, and 0.5 marks are allocated to identification of I/S or B/S for total of 1 marks. Part II UCMP Ltd. uses Allowance Procedure Only for estimating uncollectible accounts receivable. The company has the following unadjusted trial balance information on December 31, 2012: Accounts receivable Allowance for doubtful accounts Sales (all on credit) Sales returns and allowances Dr. $450,000 $12,000 $45,000 Cr. $1,025,000 Past records of bad debts and doubtful accounts indicate that reasonable estimates of bad debts expense and doubtful amounts of accounts receivable are at 2% of net credit sales and 5% of gross account receivables respectively. REQUIRED: For each component of the journal entries, clearly state whether the entry (dr./cr.) is made to the income statement (I/S), balance sheet (B/S) or statement of other comprehensive income (OCI). For example, Dr. Cash (B/S) $10; Cr. Revenue (I/S) $10. 1) Prepare the journal entry for recording bad debts at December 31, 2012 (4 marks). 1) Ending balance of Allowance for doubtful accounts = 450,000*5%=22500 Bad Debt Expense = 22500 - 12000=10,500 1 marks 1 marks Dr. Bad Debt Expense (I/S) 10500 Cr. Allowance For Doubtful Accounts (B/S) 10500 Each line: 1 mark 2) On February 14, 2013 Pratt Company learned that one of its major customers, CDX Inc. declared bankruptcy. Pratt Company determined that the amount of $9,000 accounts receivable from CDX Inc. is not collectible. Prepare the required journal entry. (2 marks) 1) RSM220H1S Final Exam (Winter 2013) Page 5 of 18 Dr. AFDA (B/S) 9000 Cr. A/R (CDX Inc.) (B/S) 9000 Each line: 1 mark 3) On April 2, 2013, Pratt Company unexpectedly received an amount of $5,000 from CDX Inc. as a partial settlement of the $9,000 it owed Pratt Company, which was earlier written off. Prepare the required journal entry. (4 marks) Dr. A/R (CDX Inc.) (B/S) 5,000 Cr. AFDA (B/S) 5,000 Dr. Cash (B/S) Cr. A/R (B/S) 5,000 5,000 Each line: 1 mark RSM220H1S Final Exam (Winter 2013) Page 6 of 18 QUESTION 3 (10 marks) Lapp Corp. purchased merchandise during 2012 on credit for $200,000; terms 2/10, n/30. All of the gross liability except $50,000 was paid within 10 days after the purchase. The remainder was paid within the 30-day term. Lapp Corp. uses a periodic system. REQUIRED: Assuming that the net method is used for recording purchases, prepare the entries for the purchase and two subsequent payments. For each component of the journal entries, clearly state whether the entry (dr./cr.) is made to the income statement (I/S), balance sheet (B/S) or statement of other comprehensive income (OCI). For example, Dr. Cash (B/S) $10; Cr. Revenue (I/S) $10. Record purchase: Dr. Purchases.................................................................................................(B/S or I/S) 196,000 Cr. Accounts Payable (B/S)............................................................................ .......................................................(To record the purchase at net amount: ..........................................................................98 $200,000 = $196,000.) 3 marks @1.mark per line (account, label, number) and 1 mark for getting the numbers right. 196,000 Record the first payment: Dr. Accounts Payable (B/S)............................................................................... 147,000 Cr. Cash (B/S)................................................................................................. 147,000 ..........................................(To record payment within the discount period: ..................................................................$200,000 - $50,000 = $150,000; .98 $150,000 = $147,000.) 3 marks @1.mark per line (account, label, number) and 1 mark for getting the numbers right. Record the final payment: Dr. Accounts Payable (B/S)............................................................................... Dr. Purchase Discounts Lost (I/S)..................................................................... Cr. Cash (B/S)................................................................................................. 49,000 1,000 50,000 4 marks @1.mark per line (account, label, number) and 1 mark for getting the numbers right. RSM220H1S Final Exam (Winter 2013) Page 7 of 18 QUESTION 4 (7 marks) UnivComp sells computer hardware. The business was slow in the past year. To attract customers, UnivComp has offered a \"noquestions-asked\" return policy for 90 days in 2013. The policy allows a customer to return the product and receive a full refund within 90 days of the purchase, no matter what the cause of the return. This marketing strategy shows great success and sales have been up significantly for the first quarter of 2013. PART I REQUIRED: Discuss two scenarios that allow UnivComp to recognize sales revenue at the time of sale, and explain how sales revenue should be recognized in these scenarios. (4 marks) Solution: Scenario 1: based on past experience, returns are (or are expected to be) immaterial. Record the sale at the full amount and recognize returns as they occur. Scenario 2: based on past experience, returns are (or are expected to be) significant, but can be estimated reliably. Record the sale but reduce it by estimate of future returns. (2 marks each - 1 for identifying the scenario and 1 for the treatment)- total: 4 marks PART II REQUIRED: With reference to the IFRS conceptual framework and accounting theory, discuss revenue recognition for this scenario under \"ideal conditions\". (3 marks) Solution: PV of CFlows relevant and representationally faithful RSM220H1S Final Exam (Winter 2013) Page 8 of 18 QUESTION 5 (11 marks) Part I (7 marks) On December 31, 2012, Innis Corporation sold for $50,000 an old machine having an original cost of $70,000 and a book value of $28,000. The terms of the sale were as follows: a) $20,000 down payment. b) $10,000 payable on December 31 for each of the next three years. The agreement of sale made no mention of interest. Assume a 10 percent rate of interest would be a fair rate for this type of transaction and that Innis Corporation is using IFRS. REQUIRED: 1. Prepare the entry to record the sale on December 31, 2012. (5 marks) 1. Dr. Cash Dr. Note receivable* Dr. Accumulated depreciation ($70,000 - $28,000) Cr. Machine Cr. Gain on sale of machine * N=3, i=10, PMT=10000, solve for PV = 24,870 2. $20,000 .5 24,870 2 42,000 1 $70,000 .5 16,870 1 If Innis Corporation was reporting under ASPE and was using the straight-line method to record interest, how much interest revenue would be reported in 2014? (2 marks) 3. (30,000-24,870)/3 = $1,710 2 PART II (4 Marks) Identify and explain two approaches to accounting for government grants. RSM220H1S Final Exam (Winter 2013) Page 9 of 18 QUESTION 6 (23 marks) Answer the following INDEPENDANT parts. PART I (14 Marks) Crosby Co. exchanged an asset with Malkin Ltd. Details of the asset exchange are as follows: Original cost of asset exchanged Accumulated depreciation Fair value of equipment exchanged Cash paid RSM220H1S Final Exam (Winter 2013) Crosby $350,000 250,000 90,000 Malkin $400,000 325,000 70,000 20,000 Page 10 of 18 REQUIRED: Prepare the journal entries on the books of both companies to record the exchange assuming the transaction has: (1) commercial substance, and (2) no commercial substance. Part I (14 marks) (1) Commercial Substance - Crosby Dr. Cash Dr. Asset - new Dr. Accumulated depreciation - old asset Dr. Loss on disposal of asset Cr. Asset - old $20,000 .5 70,000 .5 250,000 .5 10,000 1 350,000 .5 Malkin Dr. Asset - new Dr. Accumulated depreciation - old asset Dr. Loss on disposal of asset Cr. Cash Cr. Asset - old (2) No commercial Substance- Crosby Dr. Cash Dr. Asset - new* Dr. Accumulated depreciation - old asset Cr. Asset - old * Carrying value of asset given up Less: cash received 90,000 .5 325,000 .5 5,000 1 20,000 .5 80,000 1 250,000 .5 20,000 .5 400,000 .5 350,000 .5 $100,000 ( 20,000) $ 80,000 No gain/loss reported in the above journal entry 1 Malkin Dr. Asset - new* Dr. Accumulated depreciation - old asset Cr. Cash Cr. Asset - old 95,000 1 325,000 .5 20,000 .5 400,000 .5 * Carrying value of asset given up $ 75,000 Plus cash paid 20,000 $ 95,000 No gain/loss reported in the above journal entry 1 Note: this asset would then be subject to an impairment test and would be written down to its fair market value of $90,000. 1 RSM220H1S Final Exam (Winter 2013) Page 11 of 18 PART II (5 Marks) Kessel Inc. (\"KI\") purchased equipment on January 1, 2010 at a price of $2.8 million. KI incurred additional costs of $500,000 for the installation, assembly and trial run of the equipment. At the time of purchase, the equipment was estimated to have a useful life of 20 years and a residual value of $0. KI uses straight-line method of depreciation. REQUIRED: On January 1, 2013, KI spent another $600,000 to upgrade the equipment. As a result of the upgrade, the equipment became more efficient. This upgrade also increased the estimated useful life to 25 years, but had no impact on the estimated residual value. Prepare the journal entry to recognize KI's amortization expense for year 2013. Show all calculations for full marks. For each component of the journal entry, clearly state whether the entry (dr./cr.) is made to the income statement (I/S), balance sheet (B/S) or statement of other comprehensive income (OCI). For example, Dr. Cash (B/S) $10; Cr. Revenue (I/S) $10 Part II (5 marks) Total cost base: 2,800,000 + 500,000 = $3,300,000 Amortization rate: 3,300,000 / 20years = 165,000 per year As of Dec 31, 2012: Accumulated Amortization = 165,000 x 3 = 495,000 Book value = 3,000,000 - 495,000 = $2,805,000 .5 .5 .5 .5 New amortization base as of Jan 1, 2013: 2,805,000 + 600,000 = 3,405,000 New amortization rate: 3,405,000/23 years remaining = 148,043 per year Journal entry: Dr. Amortization Expense (I/S) Cr. Accumulated Amortization (B/S) RSM220H1S Final Exam (Winter 2013) 148,043 148,043.5 1 1 .5 Page 12 of 18 Part III (4 Marks) Untouchables Ltd. (\"UL\") entered into following transactions on December 31, 2012: 1. UL paid Taylor Company $500,000 for the exclusive right to market a particular product, using the Taylor name and logo in promotional material. The franchise runs for as long as UL is in business. UL decided to amortize the franchise over 25 years. 2. UL incurred $300,000 in an unsuccessful patent defence. As a result of the adverse verdict, the patent, with a remaining unamortized cost of $107,000, is deemed worthless. 3. UL paid Arvind Laboratories $122,000 for research work performed by Arvind under contract for UL. REQUIRED: Prepare all required necessary journal entries to record the above transactions on December 31, 2012. Show all calculations for full marks. If no journal entry is necessary, clearly indicate \"no journal entry needed\". For each component of the journal entries, clearly state whether the entry (dr./cr.) is made to the income statement (I/S), balance sheet (B/S) or statement of other comprehensive income (OCI). For example, Dr. Cash (B/S) $10; Cr. Revenue (I/S) $10. Part III (4 marks) (i) TRANSACTION # 1 Dr. Franchise (BS) .............. Cr. Cash (BS) (1 mark) TRANSCATION # 2 Dr. Legal Fees Exp (IS). 300,000 .............. Cr. Cash (BS) (1 mark) .............. Dr. Loss on Impairment: Patent (IS) ..............Cr. Acc Amortization Patents (BS) (1 mark) 500,000 ............................ 500,000...................... 300,000 107,000 107,000 TRANSACTION # 3 Dr. Research Expense (IS) 122,000 ............................ .............. Cr. Cash (BS) 122,000 (1 mark) - must be expensed to receive mark RSM220H1S Final Exam (Winter 2013) Page 13 of 18 RSM220H1S Final Exam (Winter 2013) Page 14 of 18 QUESTION 7 (11 marks) AFG Corporation uses the revaluation model for its buildings. A new building was purchased on January 1, 2011. The building's useful life is 30 years with no residual value. The cost of the building was $29,000,000. The building's fair market value was assessed as follows: December 31, 2011 $29,500,000 December 31, 2012 $24,000,000 PART I REQUIRED: What is the balance in the revaluation surplus account (OCI) at December 31, 2011 and 2012? What is the impact of the revaluation in 2012 on the Income Statement? (9 marks) 1. 2011: Carrying value at year end Fair value Revaluation surplus, Dec 31, 2011 2012: Carrying value at end of year = [$29,000,000 x 29/30] $28,033,333 1 29,500,000 $1,466,667 1 $29,500,000 x 28/29 $28,482,759 2 Fair value 24,000,000 Reduction 4,482,759 1 Allocated to: Reduction in revaluation surplus account (OCI) Revaluation loss on Income Statement (NI) Revaluation surplus, Dec 31, 2012 1,466,667 1 (3,016,092) 2 $4,482,759 $0 1 PART II REQUIRED: How would you answer change if AFG was reporting under ASPE? (2 marks) 2. If reporting under GAAP PE, then revaluation of assets not allowed, and the only entry would be to write down the asset its fair value of $24,000,000 at December 31. 2012. 2 RSM220H1S Final Exam (Winter 2013) Page 15 of 18 QUESTION 8 (60 marks) Group Deals Inc (GDI) describes itself as a \"local commerce marketplace\". It is a marketing company that connects local merchants to consumers by offering \"Daily Deals\" on local goods and services. Daily Deals are coupons/vouchers that provide savings of 30-70% off regular merchant prices. Consumers buy the coupons and then redeem them directly with the merchants. GDI makes a commission (usually half of the savings offered to customers) on each sale. In other words, if a customer buys a \"30% off\" coupon for $70 (instead of the goods/service for $100), then GDI keeps $15 (half of the $30 discount) and remits $55 ($70 collected from customer, less $15 commission) to the merchant when the coupon is redeemed. Therefore, GDI recognizes sales of $70 and cost of sales of $55. In return for offering deep discounts on their products and services, merchants are able to reach new customers and significantly increase sales. In addition, some vouchers are never redeemed. It is now April 16th and you just joined GDI as the new Corporate Controller, and are looking forward to having responsibility over all financial reporting for the company. You really don't have time to get oriented, as the financial statements for fiscal year ending March 31st need to be finalized by next week in preparation for the audit. What is more, both the CFO and the CEO have only been with the company since January following the firing of their predecessors. As you think about the week ahead, you hear the sound of new emails coming in. You immediately open an email from Jamie Tang, Manager of Financial Reporting, with the a summary of accounting issues that you requested yesterday (Exhibit I). By the time you finish scrolling through Jamie's email, you hear the sound of another email coming in. This one is from Mark Pen, the new CFO. It is a short email, with the subject \"Meeting Tomorrow - making the numbers\": I hope you got a bit of time to settle in. I have a meeting with Nicola to discuss the numbers and the new targets set by the board of directors. We will be presenting to the board next week, so we have to make sure we are on target. As you know, our main investor sits on the board and is growing impatient. We have to show good numbers, or we might all be gone before that meeting is done! In any case, I need a report from you - by tomorrow morning - that identifies key accounting issues that remain outstanding. Where there is still some judgment or uncertainty, I need your recommendations on how we will meet the numbers. Jamie can help you, but I'm sure you can figure it out! Mark. REQUIRED: Take the role of the new Corporate Controller and prepare the required memo for Mark. Use the case analysis approach discussed in the course. EXHIBIT I: Jamie Tang's Email - Accounting Issues Here is the info you requested. It seems like deadlines on financial reporting are getting shorter and shorter, and I hope our staff will be able to take a break sometimes soon - they are burning out. I know the board is aiming for an initial public offering (IPO) by the end of the year, so hopefully then we'll be able to hire some more help. In any case, I've summarized the financial reporting issues that remain outstanding. As you know, I also joined the company in February, so I'm still getting my head around the processes and numbers. I'm excited that you have lots of public accounting experience and will be able to resolve these issues. 1 - Founder Lawsuit As you know, Andrea Mason was the founder of GDI and the first CEO. However, after ongoing conflict with the board of directors over missed earnings, she was fired in early January after missing 3 rd quarter targets. Immediately following, Andrea launched a lawsuit against the company and the board. She claims that she was fired without cause, as missed targets were set by the board and were unrealistic in the first place. The courts agreed to hear the case and the court date is scheduled for June 1 st. Andrea is suing the company for $5 million, and is separately suing the major shareholder (a private equity company) for another $5 million. Our legal advisors suggest that her case could have merit and are concerned that Andrea has emails and other evidence that would put the company in jeopardy. As a result, they suggested trying to settle, and think that a settlement of $2 million to $3 million might be acceptable to Andrea. The board is considering counter-suing Andrea and I'm sure this will be discussed at the next meeting. 2 - Government Grant In early 2012, Andrea filed an application with the government for a start-up grant. She was successful, and the company received $300,000 in funding. The grant does not have to be repaid if GDI shows that number of employees with technical background (i.e. computer science and engineering) has increased by 10 during the period of the grant. If this condition is not met, then the grant is repayable in full on June 30th, 2013. GDI has certainly hired more than 10 employees for these kinds of positions, but plans for RSM220H1S Final Exam (Winter 2013) Page 16 of 18 outsourcing have long been in place. There is pressure by the board to outsource software development and reduce costs; after all, each senior developer is earning more than $100,000 - not including benefits. Management is currently waiting until June 30 th and is expected to follow through with outsourcing after that. As a result, we have recognized the full amount of the grant into revenue. Depending on whether we meet the targets this quarter, I wouldn't be surprised if they push with outsourcing sooner and start cutting costs. 3 - Software and Website Development All aspects of internally-developed software and website development that ultimately power the business are capitalized as part of \"Property, equipment and software, net\". These amounts are then amortized over the expected economic life of 5 years. Since most of the planning and development is done by our employees, the amounts capitalized include all recruiting and training fees, as well as salaries, bonuses, and expected stock compensation. Amounts capitalized also include the costs of our legal department in activities around patenting the software and website innovations - as well as defending them. While there is currently no outstanding litigation, two companies have already lost in litigation against us. We prevailed and were able to collect on damages relating to patent infringement. 4 - Valentine's Day Hack One of the busiest periods of time in our business is around Valentine's Day. We sell tons of couple's packages at great discounts, and our customers love it. This year (I'm not sure if you remember, since it was in the news), we were hacked and the website couldn't be accessed for three whole days. While no customer data was compromised, GDI was in the news and it surely damaged our reputation. More importantly, we lost significant sales during this period. I've been thinking about how we can report this, and I think the best way would be to report all lost sales as \"extraordinary losses\". After all, we are still using ASPE, and there is no mention of 'extraordinary items' in the standards. What do you think? I mentioned this to Mark recently, and he liked the idea. 5 - \"Deals Guarantee\" We recently launched the \"Deals Guarantee\