We would like to thank you for selecting us in reviewing Maryanna’s Outdoor Easy Ltd. (MOEL) on your behalf. As a pair of well trained financial advisors, our goal is to provide you with an accurate, and unbiased understanding of appropriate accounting principles that will help you both in the future of MOEL. We understand that 50% of the ownership held by Maryanna will be sold to Stephen for the value of the net income for the fiscal year ended in December 31st, 2011. As mentioned, our objective in this report is to provide fair explanations to particular accounting procedures that will help determine a fair selling price for Maryanna’s 50% stake in MOEL. In order to do so we will assess the information provided and use our knowledge of accounting policies and ethics to create fair recommendations for both parties. The recommendations provided below will ensure that fair treatment is used in accordance with accounting policies and both parties involved leading to a successful partnership for both of you, Maryanna and Stephen, alongside to an appropriately managed business.
We realize that both of you have certain areas of concern as to which some clarification is needed. The financial statements have always been prepared by Maryanna or her accountants and that is what we will be using for our report but we would like to answer your particular questions as detailed as possible to ensure that fair judgments are made and that the future relationship between both partners is bonded.
As advisors we need to have all the information to ensure that our recommendations and judgments are accurate as possible. We found that, from the information provided there is no evidence of what are the accounting standards being used in MOEL currently. In order to effectively mediate a fair value, we will be applying the ASPE principles when necessary which will help us make organized and fair decisions for both parties. We chose to use ASPE because the company is a private firm that does not operate on a large scale. It is also a simple and cost effective accounting standard to implement and utilize making it the ideal methodology to apply to Maryanna’s Outdoor Easy Ltd. (MOEL)
As we began looking into the information provided and recognizing concerns both of you may have, we came across the transactions of the 20 gazebos. We realize that 20 gazebos were purchased from a financially stressed supplier at $1000 each. All 20 were then sold in a contract to the municipality where 10 had been delivered and paid for, and the remainder 10 will be paid for and delivered in spring of 2012. MOEL’s requirements are that payments are collected 30 days after delivery and all 20 gazebos are being sold at 20% gross margin. After analyzing the situation, we were quick to discover that the problem with this transaction is revenue recognition.
Revenue recognition is the practice of appropriately recognizing revenue in accrual accounting. Although there is a contract is all the revenue recognized or only partially of what’s been delivered. To make this simple under ASPE there are several criteria that must be all satisfied in order to ensure revenue can be recognized. Below are the listed criteria along with the percentage of how much is complete within the contracted sale of 20 gazebos to the municipality.
Revenue Recognition Test
- Collection of payment is reasonably assured. (100%)
- Revenue can be reasonably measured. (100%)
- Costs of earning revenue can be reasonably assured. (100%)
- Risks and rewards have been transferred from seller to buyer. (50%)
- Seller has no further involvement over the goods being sold. (50%)
Looking at these criteria, we learn that not all of it has been fulfilled as of this current moment so not all the revenue can be recognized in fiscal 2011. Although the collection is assured, and revenue is measurable as well as costs, not all the risks and rewards has been…