Yoga Plus Ltd (YPL), a private Canadian company, began operations in 2000.YPL manufactures and markets various products to retailers, including Yoga apparels, Yoga mat and the equipment for Yoga studios.YPL also wholesales accessories that meet the safety standards to major retail stores across Canada.The family of Wong established YPL in 2000 and it is owned by May Wong and Marco Wong.May and Marco are passionate in Yoga as they experienced the benefits of practising Yoga.They have been teaching Yoga for over 20 years as part-time Yoga instructors.With their vision to promote Yoga to the younger generation; they decided to establish YPL with their own savings.YPL gained popularity quickly and it became a major retailer in Yoga accessories in only a few years with a market share of approximately 90%.Recently, YPL developed its own equipment that is designed by May and Marco and they have recorded R&D cost in the financial statement

YPL had to borrow funds from a large bank to finance operations since the specialized manufacturing process is so capital intensive.YPL was able to reduce its debt load over the years but still relies heavily on its suppliers and bank for continued support and growth.The bank manager did not require YPL to provide an audited financial statements as their loan amount was not high.However, the rules changed last year and the loan officer requires YPL to provide an audited financial statement starting this year, that isDecember 31, 2018 within 90 days after the year end.The bank also stipulated that YPL must maintain a debt to equity ratio of no more than 1 to 1.

Arthur Anderson LLP (A&A) has been YPL's accountants for many years.It is now November 2018, and you are the senior accountant responsible for YPL's year end in the past.May and Marco asked you to come in before year end to help their controller establish accounting policies. You meet the owners and the controller and note the following

Revenue Recognition In September 2018, YPL shipped a container of Yoga equipment to Sport Inc (SI). To make the terms of the sale attractive and to encourage future purchases, YPL structured this deal so that no payment is required until the inventory is sold to SI's customers. For this transaction, YPL recorded a sale of $243,000 and reduced inventory by $188,000. As of today, SI has sold 20% of the truckload

Sales to Happy Yoga Sales of $450,000 were made to another company, Happy Yoga (HY). Just as it had with HY, YPL sweetened the deal with HY by offering a six-month money-back guarantee for the full $500,000.Most of the sales to HY

were made in November, so the return period will not have expired by YPL's year end (December 31). YPL has recognized all revenue for the above transaction

Research and Development Cost Innovation and Safety are the most important things for Yoga accessories and equipment.Hence, YPL has spent more than $425,000 to date researching anddeveloping new equipment and accessories.May and Marco are also aware that many opportunities exist to supply their equipment to non-competing retailers.May and Marco are sure that the $175,000 spent on research and the additional $250,000 spent on development of patented product will result in long-term financial security.YPL capitalized the full $425,000 as an asset on the statement of financial position.May calculated that the present values of the revenues and expenses are $1,340,000 and $1,130,000, respectively.

Note 1 - the depreciation of the building was based on a 20% allocation, since the development lab accounts for approximately 20% of the building.

Exchange of Inventory During the year, YPL exchanged Yoga equipment inventory with Computer Supplies Ltd based on its expansion plan to upgrade the hardware in their stores and warehouse.YPL paid Yoga Equipment $1,000 in cash. The inventory given up cost $85,000 and had a fair value of $96,000.YPL received 300 tablets that YPL could otherwise have purchased from its regular suppliers. The purchase price can range from $25 to $38 per unit.The controller has not recorded this transaction because he doesn't know how. "It's really like nothing happened," he tells you. "We gave them something and they gave us the tablet. That's why I didn't record anything

Government Grant

On April 30, YPL received a $120,000 grant from a special federal government funding program. The grant was provided to help offset the costs incurred to purchase an equipment used in the manufacturing process. The equipment is expected to have a useful life of ten years. "I have recorded the entire amount in revenue because we received the cheque in August," the controller told you. YPL depreciates all assets on a straight-line basis.

Inventory Valuation

YPL has 1,000 Yoga mats in inventory with an original cost of $20 per mat. These mats were written down to their net realizable value of $15,000 in June when there was a safety concern, which was suspected by the government. "It is too bad that we had to take a write-down to zero" the controller complained, "because three months after, the government told us that there would be no safety concern after they have undergone a through investigations for the materials we used".Our mat now have a net realizable value of $27." A review of YPL's inventory reveals that 750 of the mats are still in stock at year end.

Exclusive Agreement

YPL purchased, for $25,000, a lifetime exclusivity agreement with two of the largest Yoga supplies retailers in Canada. The entire amount was expensed in 2018. " We looked at the cost-benefit of setting up our payment for this agreement as an intangible asset and decided that the required annual impairment testing would be too difficult and costly to comply with. Furthermore, we were not sure if it would be considered an asset to begin with," the controller said, "so, we just expensed the $25,000. We do not mind expensing the cost because we are quite pleased with our current debt to equity ratio of 0.8 to 1."

The draft balance sheet is shown in Exhibit I.Please advise whether YPL violates the loan covenant set by the bank and recommend some action, if needed.Also, May would like to know the impact on debt and equity for the year end based on each of the issue above.

Required Prepare the report to May, Marco, and the controller that addresses the accounting issues and prepare a revised balance sheet after you have analyzed each of the accounting issues.

a)Introduction (20 marks)

b)Issues Analysis (66 marks)

c)c) Conclusion (14 marks)

Start Ber untitled.pdf X + v X n file:///C:/Users/Paria/OneDrive/Desktop/untitled.pdf . . . 3 of 5 0 + 2 Fit to page [ Page view A Read aloud Add notes So Innovation and Safety are the most important things for Yoga accessories and equipment. Hence, YPL has spent more than $425,000 to date researching and developing new equipment and accessories. May and Marco are also aware that many opportunities exist to supply their equipment to non-competing retailers. May and Marco are sure that the $175,000 spent on research and the additional $250,000 spent on development of patented product will result in long-term financial security. YPL capitalized the full $425,000 as an asset on the statement of financial position. May calculated that the present values of the revenues and expenses are $1,340,000 and $1,130,000, respectively. A breakdown of the costs is as follows: Research Costs: Fees paid to the consulting firm $ 100,000 Materials used 75,000 175,000 Development Costs: Salaries of product engineer 100,000 Salaries of office administration staff 20,000 Building depreciation (Note 1) 20,000 Depreciation of equipment used in development process 50,000 Supplies used in the facility during development 60,000 250,000 425,000 Note 1 - the depreciation of the building was based on a 20% allocation, since the development lab accounts for approximately 20% of the building. Exchange of Inventory During the year, YPL exchanged Yoga equipment inventory with Computer Supplies Lid based on its expansion plan to upgrade the hardware in their stores and warehouse. YPL paid Yoga Equipment $1,000 in cash. The inventory given up cost $85,000 and had a fair value of $96,000. YPL received 300 tablets that YPL could otherwise have purchased from its regular suppliers. The purchase price can range from $25 to $38 per unit. The controller has not recorded this transaction because he doesn't know how. "It's really like nothing happened," he tells you. "We gave them something and they gave us the tablet. That's why I didn't record anything". AF640 2194 INDIVIDUAL. ASSIGNMENT P 3 Type here to search P Z ENG 9:36 PM 2019-06-02Start Per untitled.pdf X + v X n file:///C:/Users/Paria/OneDrive/Desktop/untitled.pdf . . . 5 of 5 | 0 + Fit to page [ Page view A' Read aloud _ Add notes So TAF640 2194 INDIVIDUAL ASSIGNMENT P.4 Exhibit 1 YPL Draft Balance Sheet December 31, 2018 Current Assets Cash 100,000 Others 151,000 Inventory (all) 800,000 Short-term investment 22,000 1,073,000 Property, plant and equipment (net) 2,552,000 Research and Development Cost 425,000 4,050,000 Current Liabilities Accounts payable 150,000 Short-term bank loan 100,000 Accrued liabilities 50,000 300,000 Long-term Liabilities Long-term bank loan 1,500,000 Equity Capital stock 1,200,000 Retained earnings 1,050,000 4,050,000 Debt to equity ratio = 0.80 Type here to search M 9 Z ENG 9:37 PM 2019-06-02