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Chapter 3 Research Process   Case Studies 3

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Chapter 3 Research Process

 

Case Studies

3.5

Presto Hospitality-Lease Scope Research

Research this question: Is Presto entitled to substantially all economic

benefits from use of the identified assets? What is the significance of this question (in other words, what happens

if the answer to this question is yes? What if the answer is no?). You may need to review the sample memo at the

end of Chapter 4 for additional guidance on Presto's identified assets. In researching this question, in addition to the

facts presented previously, consider also that Stadium Co. can require Presto to source supplies from sponsors of the

stadium (Stadium Co.'s "official sponsors").

As necessary, identify additional questions you might ask-or facts you might gather-in order to fully research

this question.

 

3.7

Industry Research, Lease Adoption

In their adoption of ASC 842 (Leases), companies in the travel and hospitality

industry debated the question of whether hotel rooms are leases.

Apply the research process to this question as follows:

a. Research the industry-what are some companies that own or operate hotels?

b. Locate disclosures from one of these companies to get a better understanding for how they describe hotel

room rentals (both from a business and an accounting perspective). Review, for example, the latest l 0-K for

one of the companies you identified.

c. Define the research question.

d. Stop and think: What answer makes sense to you, and what are the potential implications of this judgment?

e. Search for guidance. What guidance does the Codification offer that might address this issue?

f Analyze and document the alternatives.

g. Conclude and justify your position.

 

3.8

Identifying Researchable Questions Facts:

Imports Inc. is a U.S. public company and has a calendar year-end.

Imports purchases auto parts from Korea and sells them to domestic car dealerships around the U.S. On November

1, 20Xl, Imports received a shipment on account of $400,000 worth of shocks and struts from its Korean supplier.

Unfortunately, the pa1ts were defective. Faced with commitments to deliver working parts to its own customers,

Imports paid $200,000 on l I I I 5/X I to a domestic third party to fix the defective parts. However, even after the repair

effort, the shocks and struts remained defective.

Impo1ts has not yet paid the Korean company for the parts purchased.

In early December, Imp01ts requested repayment from the manufacturer for its costs of repair ($200,000).

However, when the manufacturer refused to pay, Imports sued the manufacturer on 12/15/XI for its amount invested

($200,000) plus an additional $100,000 for lost revenues.

On February 2, 20X2, a U.S. court ruled in favor of Imports, awarding Imports Inc. $300,000, payable ratably

in three monthly installments to begin on 2/15/X2.

Required:

l. Identify Import Inc.'s researchable questions as of 12/31/Xl related to this series of issues.

2. Identify Import Inc.'s researchable questions as of 2/2/X2 related to this series of issues.

3.9

Change in Estimate versus Error Correction Facts:

Your company, PlumbAll, provides routine and quick response

plumbing services to a range of corporate customers. Customers are expected to pay on the first of each

month, in advance of receiving services. One of your customers is a private school that has been a longtime customer.

The customer has not paid for the last four months of services (September-December 20X I); neve1theless, to

maintain a positive relationship, your company continued to provide services during that time. Your company ceased

providing services in January 20X2 and found out in that same month that the school filed for bankruptcy in August.

You now believe that collection of the missed payments is extremely unlikely.

Your company has already issued financial statements to lenders (for the period ending I 2/3 1/X I) that reflected

revenue and a corresponding account receivable related to this customer of $11,000 per month for services provided

to this customer. Those financial statements also reflected the company's standard allowance (reserve) amount on

receivables of 3% of sales. In total, your company's average monthly sales amount to $300,000.

Required:

l. Evaluate whether receipt of this information indicates you have a change in estimate or whether the customer's

bankruptcy results in this event being considered an error in previously issued financial statements.

2. Describe the accounting treatment required by the Codification for each alternative. Suppo1t your explanations

with draft journal entries.

3. Briefly state which treatment appears to be more appropriate given the circumstances, describing any assumptions

you made in concluding.

 

3.11

You Create the Case (Applying the Accounting Research Process)

On your own, create a fictitious fact pattern (accounting problem/business issue) to which you can apply the accounting research process. If you can, use a fact

pattern based on a real situation that you've encountered professionally. Alternatively, the following sources may help

you generate ideas: ( l) The Codification: browse for guidance, then "back into" a fact pattern; (2) recent business news

articles (e.g., from the Wall Street Journal); (3) discussions with small-business owners; or (4) corporate annual repo1ts.

Required:

1. Describe the fact pattern.

2. Identify at least l researchable question for this fact pattern.

3. Brainstorm the likely answer to the question.

4. Locate the applicable Codification reference. Describe the requirements, plus any alternatives available.

5. Briefly describe your conclusion.

 

Now you TRY 3.4

 

Assume that Michael and his team conclude that Presto should account for this contract as a lease.

Brainstorm some additional research questions that could arise as a result of this conclusion

 

Now you try 3.10

 

Brainstorm, then briefly describe, a "lesson learned" that you've experienced already, in your brief

career-to-date as an accounting researcher.