Assume the role of Brandon and prepare the report. The financial statements are prepared in accordance with ASPE.
Kentuckyville Slugger (KS) is a manufacturer of baseball and softball accessories. The company was established by Sammy Sousa in 1913, and produced only wooden baseball bats. KS has evolved over the past hundred years to offer a wide variety of products, including aluminum bats, batting gloves, cleats, and fielding gloves. KS’s products are sold in Canada, the United States, and Mexico. Since inception, the company has continued to be a family-run, closely held business with its manufacturing plant located in Red Deer, Alberta.
Recently, the company has been finding it difficult to compete in the global marketplace due to the fluctuating Canadian dollar, the lower wage costs in Asia, and a general decrease in consumer discretionary spending following the global credit crisis. The recent competitive pressures have made it difficult for KS to reinvest in its capital assets in order to become more efficient.
The current CEO, Michael Sousa, does not want to relocate as the company is a long-standing member of the Red Deer community, providing many citizens with well-paying jobs. However, the competitive landscape is making it difficult to continue the status quo.
Michael has recently come across a new government grant program that is part of an initiative to improve the productivity of Canadian companies and promote employment. The program provides eligible manufacturing companies with the opportunity to receive a forgivable loan to upgrade their capital assets in the interest of efficiency. The following criteria are used to assess eligibility:
- The grant must be used to invest in capital assets that will improve productivity, as measured by output per employee hour.
- The grant must promote employment in the manufacturing sector in Canada.
- The company must display a financial need for the application.
If obtained, the grant would allow KS to continue to operate in Red Deer with the same workforce and increase its output by at least 20%. Audited financial statements must be included with the grant application.
Brandon Sousa, CPA, is the controller of KS. Recently, Brandon has begun preparing the December 31, 2020 year-end financial statements to provide to the external auditors. Brandon recently met with Michael in order to discuss certain transactions that have yet to be recorded in the books of account. Michael would like Brandon to prepare a report that discusses the appropriate accounting treatment of these transactions. The notes from the meeting can be found in Exhibit I.
Notes from Meeting with Michael
- KS entered into a sales agreement with the Canadian Hardball Association (CHA) to provide 5,000 hardball bats (at a price of $50 per bat) for an upcoming international baseball tournament that will be held in Canada. The bats were shipped to the CHA during the month of November 2020. Per the agreement, the CHA has until February 2021 to inspect the bats in order to determine if they meet international safety and performance standards.
- KS has manufactured bats for similar tournaments in the past and has never had an issue meeting the safety and performance standards. Michael suggests not recording any revenue in the current year because the CHA has the right to accept or reject the quality of the bat.
- KS delivered 2,500 soft-spike cleats to The Shoe Store for $100,000 in December. The cleats were sold during the holiday season. The cleats can be returned to KS within one year of the purchase date in the case of a manufacturer defect. Past history suggests that 5% of the cleats are returned within the one-year return period. Michael suggests that the revenue should be recorded once the right of return period lapses.
- During the year, KS entered into a sales agreement with SportStore (SS) whereby KS designed and manufactured an aluminum bat that is to be sold exclusively through SS’s retail stores across Canada. The exclusive agreement is for a two-year period, at which point the bat can be sold through other retailers. During the agreement period, SS must purchase a minimum of 100,000 bats from KS at a price of $55 per bat. During the year, SS purchased 45,000 bats.
- KS incurred $155,000 in design and development costs during the year in developing the bat. KS incurs $25 in costs to manufacture the bat. Michael suggests that the $155,000 design costs be expensed in the current year.
- KS sold on credit 2,500 KSX baseball gloves for $50,000 to Q-Mart in November 2020. Q-Mart is a large public company, with retail stores across Canada and the United States. Around year end, analysts have begun reporting that Q-Mart is having serious financial difficulties and may file for bankruptcy if its lenders do not restructure its debt. Q-Mart’s share price has plummeted in recent weeks. Michael suggests writing off the $50,000 account receivable.
- During the year, KS acquired a new storage warehouse in Red Deer. The warehouse was purchased for $250,000. KS then incurred $10,000 in costs to install an HVAC system and $7,500 to replace the roof shingles. Michael suggests expensing the additional costs ($17,500) as repairs and maintenance.