Reference no: EM132771359

Patricia Leather Company is a small private company located in Montreal. The company was established five years ago and has become increasingly popular with small local stores which have been carrying its custom-made leather products. PLC sells its products to the stores and the stores sell the merchandise to end-users. Due to its initial success, PLC decided to open its first retail store in 2011. In its first year of operations, the company did fairly well reporting net income of $80,000. Management was certain sales would increase in the next fiscal year and was considering three alternatives for growth.

Alternative 1: Sales on Consignment

• Management believed it would be a good idea to start selling their products on consignment through retail stores. Instead of selling the products directly to the retail stores as they had been doing, they believed selling the merchandise on consignment would increase revenue.

Alternative 2: Installment sales

• Management was considering selling its products as installment sales in its retail boutiques. They would allow clients to pay for their products in up to four separate payments. Since many of the leather products are pricey, they believed this would be a good idea to increase sales.

Alternative 3: Franchise revenue

• Management was also considering making PLC into a franchise. They have heard that franchisors collect initial fees and ongoing fees without really being involved in the franchisee stores. They believe this could also be a good idea to increase their sales.

• PLC has hired you as an external consultant and has asked you to consider the three options above. They would like to go ahead with only one of the alternatives.

Required

Problem 1: Discuss the financial reporting issues involved in the three alternatives outlined above.