You are a junior accountant, recently employed by Tech 4U, a company that sells smartphones that are customized for each user through a specialized process that allows the purchasers own photographs to be printed directly on the surface of the phone. As well, the company provides internet access (WiFi hotspots) to customers who choose to purchase their phones with a two-year service plan. The company is based in Alberta and has recently been listed on the TSX Venture Exchange. The December 31, 2022 year-end will be the first year that the company is required to present financial statements prepared under IFRS.

You arrive at work on a Monday morning in early January 2023 and receive the following email: To: Junior Accountant

From: Controller

Re: Preparation for annual audit

I am preparing the working papers for the December 31, 2022 year-end audit to present to the companys auditors when they arrive late next week. In reviewing the draft financial statements and other information, I have identified several issues that need to be addressed:

1) Inventory Errors: in reviewing the documentation obtained during the December 31, 2022 inventory count, I discovered a number of errors. The details are provided below.

a) We received an invoice from a supplier on January 3, 2023 for goods we purchased with a cost of $16,000. This invoice was entered into our accounts payable system on that date. The goods were shipped by the supplier on December 26, 2022 and were received by us on January 3, 2023. The invoice terms were 2/10, n30, FOB shipping. These goods were not included in the December 31 inventory count.

b) Included in the inventory count were goods we sold with a cost of $13,000, which were waiting to be picked-up by the freight company for delivery to customers. The terms were 1/10 net 30, FOB shipping. The goods had been invoiced to the customers on December 31, 2022 at $22,000.

c) We discovered one box of clear plastic covers used to finish the printing process that was missed in the December 31 inventory count. The box was in our warehouse on December 31, 2022 but was missed because it was hidden in a corner, behind several other boxes. The box had a cost of $2,000, and the invoice from the supplier had been recorded in our accounts payable system prior to December 31, 2022.

2) Revenue Recognition: we offer three options to our customers. They may purchase the phone itself without any photo printing or internet access, they may buy the phone with photo printing but no internet access, or they may buy the phone with internet access and the photo printing.

Our product prices and unit sales for 2022 are as follows:

Phone only

Phone plus photo printing

Phone plus photo printing plus internet access

$800 1,500

$950 6,000 $1,300 9,400

Product/Bundle

Price/Unit

Units Sold

Although we only offer these bundles, we have determined using the adjusted market assessment approach that the stand-alone selling price of the photo printing process is $200, and the stand-alone selling price of the internet access is $475.

Before I finalize the working papers for the auditor, I need you to summarize the key financial reporting issues.

For the inventory errors, please provide a table in the following format:

A

B

C Total

The table should indicate the effect of each error on the relevant accounts if the error remains uncorrected. As well, please provide an explanation of your reasoning for each error.

For the revenue recognition issue, please identify the separate performance obligations that we will need to consider in our accounting and provide a calculation showing how much revenue should be recognized in 2022. Also calculate the amount of deferred revenue that will be reported on the balance sheet at December 31, 2022. Although sales occurred throughout the year, I would like you to simplify the calculation by assuming all sales occurred on June 30, 2022.

I am away on a conference this week. Please provide a memo to me by next Monday that addresses the issues identified above.

Required:

Prepare the requested memo to the controller.