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Adv fin. reporting.docx - Task #1 Analysis and...

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Task #1Analysis and recommendations on accounting issues.Task#2Analysis of the accounting department – indicate strengths. weaknesses andrecommendationsMemoTo: Wendy Hobart, Founder of Cool Taste Inc.From: CPASubject: Accounting issues and analysis of the accounting department.1. Accounting issues:PriceCo contractIssueCTI entered a contract with PriceCo to provide juice products. The contract includes aright to return if delivered products won’t have the same flavor and quality of the currentrefrigerated products produced by CTI. In August 2021, the shipment of $300k ofproduct was refused by PriceCo. In addition to this returned PriceCo product, CTI hadan additional $200k of the product using the old recipe still in inventory that had yet tobe shipped.Also, PriceCo agrees to purchase a minimum quantity of product during each year ofthe contract term (August 1 through July 31 each year). If the minimum quantity is notpurchased, PriceCo must pay the difference (“take or pay”) between what was orderedand the minimum purchase amount by August 31 each year.The issue relates to when the amounts should be recognized as revenue given thatsome product may be returned subsequent to year end. Also, it should be determined ifthe inventory which wasn’t accepted by PriceCo must be written off or it can be still soldto a different customer.Handbook AnalysisASPE Section 3400 Revenue should be consulted to analyze this issue.1.Performance has been achieved—in other words, the risks and rewards of ownershiphave transferred to the buyer. – NOT MET – The products were delivered howeverPriceCo has a right to return products if they do not meet specified criteria. CTI stillbears the risk related to the ownership as if the products are returned, most likely CTIwill not be able to re-sell them, and they will have to dispose them.
2.Consideration is reasonably measured. – partially MET – PriceCo is obligated topurchase a minimum quantity of the products during the year, therefore we candetermine the minimum revenue amount for a year.3. Reasonable assurance exists that consideration will be received(collectability). –MET – there is no indications that there are problems with collections.ASPE 3400.21 (b), regarding returns, it states: “Revenue would not be recognized when

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Term
Spring
Professor
Robbie
Tags
Balance Sheet, Expense, cti

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