QUESTION Peter Anderson and Jack Stone started their own airline Enterprise Resource Planning ("ERP") system software company by the name of AirSoft Corporation (herein referred to as "AirSoft" or "the Company"). The Company was created with the purpose of helping individual airlines and travellers. Airlines would be able to reschedule flights and notify travellers in real-time if any disruptions arise or cancellations occur. The software is linked with all flight data, including original departure and arrival times, airfare bookings and charges, number of passengers onboard a plane, and baggage information for individuals so that they can track the location of any bags that were checked in. Financial data and payroll data would also be managed through the ERP system. It is now September 30, 2022. AirSoft is preparing their year-end books for their annual audit. You, CPA, work for Leslie and Litt LLP as a financial reporting consultant. Partner: CPA, welcome to the firm! I am providing you with your first assignment. I met with Peter and Jack both of whom are preparing for the year-end audit. They had several financial reporting questions they wanted us to provide some answers on prior to commencing year-end audit procedures. Can you have a look at the notes I have provided below for your consideration? If you can provide me with a final report for my review by October 23,2022 , that would be great! I would also like to let you know that our client is looking to get additional bank financing for acquisition of another software company. The bank indicated that they want a minimum working capital ratio of 1.25 in order for the financing to go through. If we are going to have problems here, I would like the client to know soon. Please also prepare an adjusted statement of financial position after all adjustments. You took notes from the discussion you had with the partner of the firm, went back to your desk, and started working on the issues discussed. You are reminded that the report does not need to explicitly mention the users of the case as the client is aware of all of the users involved. The Company only wants discussion on financial reporting issues and their implications on the Company overall, along with other pertinent issues that should be raised to the attention of management. Exhibit I Company Background AirSoft sells software to airline for the purpose of helping airlines with managing their operations. They are a private company and use ASPE as their financial reporting framework. As mentioned earlier, the software helps with booking flights, having travellers book tickets online, and allow travellers to gain the ability to track their baggage. The Company's key revenue lines are as follows: Software subscription services The Company offers software subscription services to their clients. Clients would be able to subscribe to the software as a service and renew the service on a yearly basis. The subscription fee would be billed at the start of the year. Payment to AirSoft is due within 60 days of starting the subscription services. The software would cost a client $2,000 per year per individual subscription. With the yearly renewal, customers would benefit from annual bug fixes and additional functionality upgrades. Software licensing AirSoft grants customers licenses to use the Company's software. Unlike the subscription model where yearly renewal would be required, the licensing process would allow the customer to have the software for a certain number of users. Customers would have access to a pre-set number of modules within the software and would need to purchase additional modules at a certain price if additional functionality is required for their operation. The software would not be subject to any upgrades annually. If the customer wants an update, new licenses will need to be purchased. Support services and installation In 2022, with the increase in travel demand and the increased capacity required for software to handle the incremental demand, AirSoft hired additional IT support staff to support AirSoft operations. AirSoft started providing support and installation services as a separate package to the software subscription/licensing services that it has always provided. This would allow smaller airlines (without limited IT staff) to benefit from having support staff available should issues arise with the software being used. Clients could purchase a support service and installation service together for $10,000 per year, purchase the support service alone for $7,000 per year, or the installation service for $3,000. Payment is due within 60 days of purchasing these services. The term of these support services would be one year from signing of the contract. These services can be renewed on a yearly basis. Exhibit II Financial Statements Airsoft Corporation Statement of Financial Position Exhibit III Notes from Discussions with Peter Anderson The Company hired a new bookkeeper as the old bookkeeper left AirSoft in August 2022. Peter did not have time to review the books for year-end. He noted that the bookkeeper had questions on the items below. Support Services On September 15, 2022, AirSoft signed contracts with 20 customers for the support service packages. An additional 15 customers were signed for the support service and installation service packages combined. Of the 15 customers, 10 installations were completed prior to September 30, 2022. The bookkeeper recognized all amounts directly in revenue at year-end. None of these customers paid for these services as of year-end. A credit check was conducted on all of these customers, and there are no indications pertaining to their inability to pay within 60 days. Software Licenses On September 25, 2022, AirSoft received deposits from 10 customers for licenses they wanted to obtain of the AirSoft ERP system. The total amount received was for $300,000, which is equal to the quotes provided to these customers. AirSoft was unable to provide licenses to these customers until October 5, 2022. All of these amounts were recognized as revenue at year-end as cash had been received at year-end. Commission Program At the beginning of the fiscal year, a commission program was introduced to the Company's sales team. Salespersons of the Company would earn not only a salary, but they would also earn a commission of 5% on each new sale they bring into the Company. A total of 5 new customers were brought into the Company. Each of these customers purchased software subscription services. The total amount of sales brought by new customers is $240,000. The commissions will be paid out by November 30,2022 . As of September 30, 2022, the Company did not record the commission transaction as the bookkeeper was unsure of whether recording such transaction was warranted. Equipment repair On July 1, 2022, one of our server/equipment broke down. The cost of $11,500 in repairs is included in repairs and maintenance expenses. The repair company claims the repairs will increase the server's service capacity, increase the cycle time by 10%, and increase capacity by 5% to 10%. The programmer staff really did see a difference in the performance of the server after the repairs. The server is expected to last another five years beyond the date of repair. AirSoft uses the straight-line method for amortization purposes and pro-rates for the number of months the asset was owned in the year. QUESTION Peter Anderson and Jack Stone started their own airline Enterprise Resource Planning ("ERP") system software company by the name of AirSoft Corporation (herein referred to as "AirSoft" or "the Company"). The Company was created with the purpose of helping individual airlines and travellers. Airlines would be able to reschedule flights and notify travellers in real-time if any disruptions arise or cancellations occur. The software is linked with all flight data, including original departure and arrival times, airfare bookings and charges, number of passengers onboard a plane, and baggage information for individuals so that they can track the location of any bags that were checked in. Financial data and payroll data would also be managed through the ERP system. It is now September 30, 2022. AirSoft is preparing their year-end books for their annual audit. You, CPA, work for Leslie and Litt LLP as a financial reporting consultant. Partner: CPA, welcome to the firm! I am providing you with your first assignment. I met with Peter and Jack both of whom are preparing for the year-end audit. They had several financial reporting questions they wanted us to provide some answers on prior to commencing year-end audit procedures. Can you have a look at the notes I have provided below for your consideration? If you can provide me with a final report for my review by October 23,2022 , that would be great! I would also like to let you know that our client is looking to get additional bank financing for acquisition of another software company. The bank indicated that they want a minimum working capital ratio of 1.25 in order for the financing to go through. If we are going to have problems here, I would like the client to know soon. Please also prepare an adjusted statement of financial position after all adjustments. You took notes from the discussion you had with the partner of the firm, went back to your desk, and started working on the issues discussed. You are reminded that the report does not need to explicitly mention the users of the case as the client is aware of all of the users involved. The Company only wants discussion on financial reporting issues and their implications on the Company overall, along with other pertinent issues that should be raised to the attention of management. Exhibit I Company Background AirSoft sells software to airline for the purpose of helping airlines with managing their operations. They are a private company and use ASPE as their financial reporting framework. As mentioned earlier, the software helps with booking flights, having travellers book tickets online, and allow travellers to gain the ability to track their baggage. The Company's key revenue lines are as follows: Software subscription services The Company offers software subscription services to their clients. Clients would be able to subscribe to the software as a service and renew the service on a yearly basis. The subscription fee would be billed at the start of the year. Payment to AirSoft is due within 60 days of starting the subscription services. The software would cost a client $2,000 per year per individual subscription. With the yearly renewal, customers would benefit from annual bug fixes and additional functionality upgrades. Software licensing AirSoft grants customers licenses to use the Company's software. Unlike the subscription model where yearly renewal would be required, the licensing process would allow the customer to have the software for a certain number of users. Customers would have access to a pre-set number of modules within the software and would need to purchase additional modules at a certain price if additional functionality is required for their operation. The software would not be subject to any upgrades annually. If the customer wants an update, new licenses will need to be purchased. Support services and installation In 2022, with the increase in travel demand and the increased capacity required for software to handle the incremental demand, AirSoft hired additional IT support staff to support AirSoft operations. AirSoft started providing support and installation services as a separate package to the software subscription/licensing services that it has always provided. This would allow smaller airlines (without limited IT staff) to benefit from having support staff available should issues arise with the software being used. Clients could purchase a support service and installation service together for $10,000 per year, purchase the support service alone for $7,000 per year, or the installation service for $3,000. Payment is due within 60 days of purchasing these services. The term of these support services would be one year from signing of the contract. These services can be renewed on a yearly basis. Exhibit II Financial Statements Airsoft Corporation Statement of Financial Position Exhibit III Notes from Discussions with Peter Anderson The Company hired a new bookkeeper as the old bookkeeper left AirSoft in August 2022. Peter did not have time to review the books for year-end. He noted that the bookkeeper had questions on the items below. Support Services On September 15, 2022, AirSoft signed contracts with 20 customers for the support service packages. An additional 15 customers were signed for the support service and installation service packages combined. Of the 15 customers, 10 installations were completed prior to September 30, 2022. The bookkeeper recognized all amounts directly in revenue at year-end. None of these customers paid for these services as of year-end. A credit check was conducted on all of these customers, and there are no indications pertaining to their inability to pay within 60 days. Software Licenses On September 25, 2022, AirSoft received deposits from 10 customers for licenses they wanted to obtain of the AirSoft ERP system. The total amount received was for $300,000, which is equal to the quotes provided to these customers. AirSoft was unable to provide licenses to these customers until October 5, 2022. All of these amounts were recognized as revenue at year-end as cash had been received at year-end. Commission Program At the beginning of the fiscal year, a commission program was introduced to the Company's sales team. Salespersons of the Company would earn not only a salary, but they would also earn a commission of 5% on each new sale they bring into the Company. A total of 5 new customers were brought into the Company. Each of these customers purchased software subscription services. The total amount of sales brought by new customers is $240,000. The commissions will be paid out by November 30,2022 . As of September 30, 2022, the Company did not record the commission transaction as the bookkeeper was unsure of whether recording such transaction was warranted. Equipment repair On July 1, 2022, one of our server/equipment broke down. The cost of $11,500 in repairs is included in repairs and maintenance expenses. The repair company claims the repairs will increase the server's service capacity, increase the cycle time by 10%, and increase capacity by 5% to 10%. The programmer staff really did see a difference in the performance of the server after the repairs. The server is expected to last another five years beyond the date of repair. AirSoft uses the straight-line method for amortization purposes and pro-rates for the number of months the asset was owned in the year