Accounting Issues Analysis and Recommendations for Cool Taste

School: Langara College - Course: ACCOUNTING CORE1 - Subject: Accounting

From: CPA To: Wendy Hobart - Founder of Cool Taste Inc. Re: Accounting issues analysis and recommendations on accounting department performances of Cool Taste Inc. (CTI) Accounting issues #1. PriceCo contract Issue CTI entered the contract to provide aseptically packaged juices to PriceCo's stores starting August 01, 2022. Due to the "take or pay" provision, CTI plans to recognize minimum purchase amount as revenue. Early August 2022, the first shipment of product was returned due to quality issue. The issues are whether the revenue recognition is in accordance with ASPE, and how to record the products that don't meet the quality requirements. Handbook and analysis ASPE 3400 should be consulted to determine whether to recognize revenue. As per ASPE 3400.04-.05, revenue can be recognized if: 1.Performance has been achieved - in other words, the risks and rewards of ownership have been transferred. Not met - PriceCo has the right to refuse the product if they think that the product doesn't meet the required flavour and quality. Until PriceCo accept the product, CTI still bear the risks and rewards of ownership of the products. 2.Consideration is reasonably measured. Not met - the consideration is depended on the amount of product PriceCo ordered and accepted each period, it can be more or less than the minimum purchase amount. 3.Collection is reasonably assured. Met - PriceCo is a big discount chain with over 500 stores. It's reasonable to assume that PriceCo can pay for its orders. Since not all of the criteria are met, revenue shall not be recognized. ASPE 3061 should be consulted to determine the treatment of inventory. As per ASPE 3031.27, "The cost of inventories may not be recoverable if those inventories are damaged, if they have become wholly or partially obsolete, or if their selling prices have declined." Recommendation CTI can record the minimum purchase amount as Unearned Revenue in the financial statement. This amount should be reversed if CTI had recorded it to revenue. Unearned revenue will be recognized as revenue when products are acceptable to PriceCo. This would increase the liability of CTI and may have negative impact on the balance sheet. Unearned revenue doesn't impact net income until it is realized.

Products using old formula should be written down to net realizable value. I assume this product are custom-made for PriceCo so that it is not possible to sold to others. In this case, the write down is the net realizable value of $200,000 worth of inventory and $300,000 products returned. This will create a loss and have negative impact to CTI's profitability. The shipment was returned right after the year end and indicated the impairment of inventory. CTI should prepare a note disclosure in the financial statement. #2. Manufacturing facility Issue CTI capitalized the costs of the plant expansion. The issue is whether all of the costs should be capitalized, or which costs should be expensed. Handbook and analysis ASPE 3061 should be consulted. ASPE 3061.08 states, "The cost of an item of property, plant and equipment includes direct construction or development costs (such as materials and labour), and overhead costs directly attributable to the construction or development activity." -Interest on the financing required Met - borrowing cost directly contribute to the construction of the plant. ASPE allows the choice to expense or capitalize this cost. -Machinery necessary for the aseptic packaging process Met - to accommodate necessary machinery is the purpose of the construction. -$200,000 for the license for the new food product line Not met - this cost is related to the food production line and to be renewed annually. It doesn't directly contribute to the construction of the plant.