Zack's Fine Goods Inc. (ZF) is a large private company that manufactures and sells expensive furniture and other household items. They sell directly to the consumer and also sell to companies such as Amazon and Wayfair. They have significant debt on their balance sheet and their bank is starting to question their accounting policies. ZF has always been profitable but cash flow has sometimes not been good. They have a covenant with the bank based on a minimum net income before tax they must maintain. They have always met the covenant. As they are a private company ZF has always used ASPE. The bank is concerned that this framework is not suitable and distorting the reported income. They are considering requiring ZF to use IFRS. I They want a report from you, the accounting director at ZF that analyzes IFRS vs. ASPE for specific issues. You have always used accounting policies under ASPE that would maximize net income. The attached Exhibit 1 are the key issues that the bank would like you to analyze. Net income before tax for the year ended December 31, 2019 was $ 1,150,000. The covenant requires net income before tax of $ 1,000,000 Required. Assume the role of the accounting director of ZF and prepare the report for the bank. Lawsuit ZF was sued in 2019 for product liability. The case is still before the courts. The lawyers have stated it is likely they will lose the case but they could not determine a precise amount. ZF does not have insurance for this type of liability. According to the lawyers the amount of the loss is in the range of $ 100,000 to $ 200,000. The case is expected to be settled in 2021. Plant equipment Original cost: $ 400,000 Useful life: 10 years Residual value: $ 40,000 Depreciation method: straight line Acquired: January 1, 2017. Fair value less cost to sell at December 31, 2019: $ $ 250,000 Value in use at December 31, 2019: $ 260,000 Undiscounted cash flows for remaining years at December 31, 2019: S 320,000. Warranty ZF provides a 3 year warranty to their customers. This began in 2019. The estimate in 2019 for warranty is that there was a 60% chance the cost would be 3% of sales a 30% chance the cost would be 4% of sales and a 10% chance the warranty cost would be 5% of sales. Sales were $ 4,500,000 in 2019. Actual warranty expense was $ 10,000 for 2019. Points program ZF has a points program to build customer loyalty. This began in 2019. The customer gets one loyalty point for every $ 10 purchased. Each point is redeemable for $ 1 discount on future purchases of ZF products. The Company expects a 25% redemption rate from 2019 sales. Using ASPE ZF has correctly accounted for the cost of the points plan by accruing the cost of goods to be redeemed as a liability with an offsetting expense. This has been estimated to be $ 45,000 using their current gross margin of 60%. In 2019 financials is an expense for $ 45,000 and a liability for S 45,000 for the points program. Investment ZF has an investment in UE Limited, a private company. They own 30 % of the voting shares and have a seat on the Board of Directors. An unrelated company owns 60% and the remaining 10% are owned by several smaller companies. Due to strong competition UE suffered a loss in 2019 of $ 500,000. ZF accounts for this investment using the cost method. There were no dividends paid in 2019 by UE. Sale leaseback At the beginning of 2019 ZF entered into a sale lease back arrangement with a finance company, YK. The details were as follows: Equipment net book value on January 2, 2019 was $ 300,000 Remaining useful life of 15 years. Depreciated using the straight line method. YK took title on January 2, 2019 and immediately leased the asset back to ZF for 5 years at monthly rental of $4,000 due at the beginning of each month starting January 2, 2019 The agreed selling price for the equipment was $ 800,000 and this was paid to ZF on January 2, 2019. ZF has existing debt with an interest rate of 5% and YK demands a minimum 6% on projects such as this. ZF is aware of YK's rate of return. . Zack's Fine Goods Inc. (ZF) is a large private company that manufactures and sells expensive furniture and other household items. They sell directly to the consumer and also sell to companies such as Amazon and Wayfair. They have significant debt on their balance sheet and their bank is starting to question their accounting policies. ZF has always been profitable but cash flow has sometimes not been good. They have a covenant with the bank based on a minimum net income before tax they must maintain. They have always met the covenant. As they are a private company ZF has always used ASPE. The bank is concerned that this framework is not suitable and distorting the reported income. They are considering requiring ZF to use IFRS. I They want a report from you, the accounting director at ZF that analyzes IFRS vs. ASPE for specific issues. You have always used accounting policies under ASPE that would maximize net income. The attached Exhibit 1 are the key issues that the bank would like you to analyze. Net income before tax for the year ended December 31, 2019 was $ 1,150,000. The covenant requires net income before tax of $ 1,000,000 Required. Assume the role of the accounting director of ZF and prepare the report for the bank. Lawsuit ZF was sued in 2019 for product liability. The case is still before the courts. The lawyers have stated it is likely they will lose the case but they could not determine a precise amount. ZF does not have insurance for this type of liability. According to the lawyers the amount of the loss is in the range of $ 100,000 to $ 200,000. The case is expected to be settled in 2021. Plant equipment Original cost: $ 400,000 Useful life: 10 years Residual value: $ 40,000 Depreciation method: straight line Acquired: January 1, 2017. Fair value less cost to sell at December 31, 2019: $ $ 250,000 Value in use at December 31, 2019: $ 260,000 Undiscounted cash flows for remaining years at December 31, 2019: S 320,000. Warranty ZF provides a 3 year warranty to their customers. This began in 2019. The estimate in 2019 for warranty is that there was a 60% chance the cost would be 3% of sales a 30% chance the cost would be 4% of sales and a 10% chance the warranty cost would be 5% of sales. Sales were $ 4,500,000 in 2019. Actual warranty expense was $ 10,000 for 2019. Points program ZF has a points program to build customer loyalty. This began in 2019. The customer gets one loyalty point for every $ 10 purchased. Each point is redeemable for $ 1 discount on future purchases of ZF products. The Company expects a 25% redemption rate from 2019 sales. Using ASPE ZF has correctly accounted for the cost of the points plan by accruing the cost of goods to be redeemed as a liability with an offsetting expense. This has been estimated to be $ 45,000 using their current gross margin of 60%. In 2019 financials is an expense for $ 45,000 and a liability for S 45,000 for the points program. Investment ZF has an investment in UE Limited, a private company. They own 30 % of the voting shares and have a seat on the Board of Directors. An unrelated company owns 60% and the remaining 10% are owned by several smaller companies. Due to strong competition UE suffered a loss in 2019 of $ 500,000. ZF accounts for this investment using the cost method. There were no dividends paid in 2019 by UE. Sale leaseback At the beginning of 2019 ZF entered into a sale lease back arrangement with a finance company, YK. The details were as follows: Equipment net book value on January 2, 2019 was $ 300,000 Remaining useful life of 15 years. Depreciated using the straight line method. YK took title on January 2, 2019 and immediately leased the asset back to ZF for 5 years at monthly rental of $4,000 due at the beginning of each month starting January 2, 2019 The agreed selling price for the equipment was $ 800,000 and this was paid to ZF on January 2, 2019. ZF has existing debt with an interest rate of 5% and YK demands a minimum 6% on projects such as this. ZF is aware of YK's rate of return