Exhibit – Modern Design Co.
Date: January 10, 2015
Subject: Modern Design Co. (MD)
The following are explanations of the accounting issues as well as the analysis and recommendation to resolve the issue. Also included are the adjustments to the financial statements (Appendix A).
Barbor sofa order
On December 11, MD received an order for a total price of $22,100. Barbor Furniture Ltd. (Barbor) provided a deposit of $9,000 which was recorded as revenue when it was received on December 13. Barbor was not billed until January 2. The order was not shipped until after the year end on January 2. The remaining balance owing was recorded in accounts receivable and …show more content…
This will increase assets and liabilities, as the inventory and accounts payable will both impact the balance sheet.
In July, one of the saws broke down. It cost $11,500 in repairs and is expected to prolong the expected life of the asset by 5 years. The repairs are expected to increase the saw’s service capacity, cut production time by 10% and reduce waste by 5-10%. The issue is whether the cost of repairs should be included as an expense in repairs & maintenance or as a property, plant & equipment.
According to ASPE 3061, property, plant and equipment are identifiable tangible assets that meet all of the following criteria:
1. The assets are held for use in the production or supply of goods and services, for rental to others, for administrative purposes or for the development, construction, maintenance or repair of other property, plant and equipment;
2. Have been acquired, constructed or developed with the intention of being used on a continuing basis; and
3. Are not intended for sale in the ordinary course of business.
Betterment – the cost incurred to enhance the service potential of an item of property, plant and equipment is a betterment. Service potential may be enhanced when there is an increase in the previously assessed physical output or service capacity, associated operating costs are lowered, the life of useful