Reference no: EM133009494

Coco Printing Inc. (Coco) is a family owned and operated business that prints posters and advertising materials. Elliott Coco started the business 15 years ago and is now succeeded by his2 sons, Tom and Adam. Under the terms of the shareholder's agreement, either party may buy the other out at a price of 10 times of the current net income.Profits from the last two years have been significantly declining. This is a direct result of the changing landscape of the industry, which has been moving toward digital printing. Tom and Adam have an aggressive plan to change the revenue mix from traditional to digital printing. To finance this transition, Coco borrowed money from the bank at the end of 2017 for the purchase of digital printing equipment. Some changes were made to the original equipment to accommodate for the printing of certain advertising materials. Despite an increase in digital sales, Coco did not achieve its revenue target for 2021 or 2022. In addition to the slow digital revenue growth, Coco has recently lost its top two traditional print clients, who accounted for 50% of overall revenues. Tom and Adam are concerned with Coco 's ability to continue making payments on the outstanding loan under the current conditions. Tom and Adam are actively communicating with the bank regarding potential alternatives. Given Coco 's history with the bank, concessions will be made by the bank including a reduction of theinterest rate from 10% to 8%, a three-year extension of the current maturity, and a reduction of principal from $2 million to $1.5 million. The restructuring agreement was signed just before year end of 2022. Management is confident that the old debt should be eliminated from the balance sheet. The current market discount rate is 9%.Coco also has a new sales plan that it is offering to digital customers. Revenue contracts include an upfront non-refundable fee and a term of two to three years. Customers are charged a per-unit fee for each digital print and a flat fee for any change in concept or design. Each contract has a minimum value so Coco earns a flat rate even if digital printing jobs are never performed. The catch to the lucrative contracts are that Coco must be available to print on-demand 24 hours a day, 7 days a week. All of Coco 's current digital print customers are small businesses, two of which have recently filed for bankruptcy.Coco plans to use the digital printing equipment only for five years. At the end of this period, Coco is expecting to pay $100,000 for any modifications necessary to update and prepare the equipment for sale to another vendor. A liability of $100,000 has already been recorded in the books in 2022. The accountant who prepared the journal entry has asked the controller to review this past transaction for accuracy.In order to conserve cash and retain the 2 key employees, Coco has issued some shares to these employees. Coco has set aside 10% of the total shares outstanding in order to remunerate these 2 employees. Under the terms of this agreement, these employees may convert their shares to cash at the end of 2022. Coco plans to have a valuation done of the company at the end of 2022 and 10% of the value will be attributable to these employee' shares. The valuation will be based on the average income from 2021 and 2022.

During 2022, Coco implemented a new customer loyalty program that grants "points" to companies based on the amount they spend. The points have no expiry date and can be redeemed against future purchases in the store. The company has already determined that the fair value of each point is $ 0.50. During the year, 700,000 points were awarded to these companies, of which 80,000 were subsequently redeemed for purchases in the stores. The company anticipates that 90% of the points will be redeemed at some point in time. Coco pays on average three weeks' vacation pay, even though Coco's legal obligation is only for two weeks. This vacation pay accumulates and can be carried over for up to one year. However, if the employee leaves before the vacation is taken, then they are only legally entitled to the two-week rate. At the end of 2022, there were 10 non-manager employees who had only taken one week of their annual entitlement during 2022. There is a probability of 15% that one of these employees will leave before the full vacation accrual is taken.By the end of 2022, Adam had decided that he wanted Tom to buy out his shares. The last few years of operations had been so stressful for him that he had developed several health problems.

Required:

Problem 1: It is the end of 2022. The financial controller is preparing notes for the upcoming meeting with the auditors. Adopt the role of the controller and discuss any financial reporting issues that should be addressed before the meeting. If applicable, include the journal entries to illustrate the accounting implication.