Reference no: EM131196496

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CASE STUDY:

This research question consists of a case study: You are a graduate accountant working for McKenzie and Associates a public accounting firm. The address of the firm is 777 South Terrace, Adelaide SA 5000. The manager of your firm, Ms. Maria McKenzie has asked you to draft a letter in response to an email received from a client - Mr. Con Pewter, the managing director of Pewter Ltd, raising a number of issues regarding his company - see the copy of the email on the next page.

Dear Maria

Thank you for your phone call this morning, as agreed I am emailing you regarding the accounting issues we briefly discussed. By the way to assist the accounting team in our decision-making process could you please make sure you reference any relevant sources relating to your advice, for example, AASBs, Corporations Act, and relevant websites.

1. A number of employees who work on our strategic management team have been with us for a number of years - at least 12 of them have been with us since the company commenced operations in 2009. In accordance with the Employee Bargaining Agreement (EBA), all employees are entitled to long service leave of 13 weeks if they remain in service for 10 years. They are also entitled to pro rata long service leave after 6 years of service. Our usual practice is to show the long service leave expense in the income statement when the employee actually takes leave and is paid. Of course, we maintain a memorandum record of the number of days each employee is entitled to. Peter, our Senior Accountant, has indicated to us that he thinks we should consider treating this expense in a different manner, which seems complicated. The directors are wondering why we should complicate a very simple way of calculating long service leave - why not "stick with" recognising the expense when we pay for it? What do you think we should do and why?

2. Our company has recently entered into a long-term and a radical agreement with several of our retailers in Australia. Under the new agreement, at the start of every quarter, we will ship a variety of our products (suitable for that state and that time of the year) to our retailers. All retailers have agreed to set aside a section in their stores to exclusively display our products including the display windows at the front of the store. In return we have agreed to pay a fee to each store on a monthly basis for allowing us the access to this window space and space on the shop floor to advertise and sell our products. The average fee is around $600 per square metre, per store per month. At the end of the quarter, the store will return all the unsold products to us and we will send out a new shipment to prepare for the next quarter. The stores will also transfer the revenue from total sales to us after deducting the display fee noted above. The board unanimously agreed to recognise the sales revenue at the start of the quarter (when the goods are shipped). At the end of the quarter when the excess inventory is returned to us by the stores, we can always make the necessary adjustments i.e. reverse both the sales revenue and cost of sales as well the amount owed by the stores and the incoming inventory. After all, the net effect would be the actual sales of the period. The board also agreed that the fee we pay to the stores should not be recorded separately because that is the cost of doing business. So we will only record the net amount received as sales revenue. This should simplify matters, shouldn't it?

3. At our recent board meeting, several directors raised concerns about spending too many man hours (and dollars I must say) on accounting for future tax consequences. Their biggest argument was that as long as the tax man is happy and we are not cheating on our tax returns, then we are simply wasting money in accounting for temporary differences and Deferred tax assets (DTAs) and Deferred tax liabilities (DTLs) (which I must admit is a mystery to me). Do you have any problems if we do not account for the DTAs and DTLs and just account for the current tax liability?

Please respond by letter (not email) as I would like to present this to the Board. I look forward to hearing from you in the near future.
Regards Con Pewter
Managing Director, Pewter Ltd Level 6, 510 King William Street,
Adelaide SA 5000