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ACCT 725 - Intermediate Accounting - Project 1 REVENUE RECOGNITION AND ACCOUNTING ETHICS Synopsis ice Village, Inc. is an U.S. agricultural commodity R merchandising firm located in the southwest region with fiscal operations conducted on a calendar-year basis (i.e. fiscal year ending on December 31). The firm's core operating business involves buying and selling agricultural products such as rice and wheat and operates multiple storage facilities in states including Louisiana, Texas, and California. Rice Village registers each storage facility as a Licensed Federal Warehouse with the US Department of Agriculture, which allows each facility to maintain physical control of the agricultural commodities while selling all or a portion of the commodity inventory for cash. Such arrangements, as a result, effectively shift ownership of those sold inventory to the purchasing firm, and hence becoming consigned goods belonging to the purchaser. Copeland realized that the desired goal might not be realized, which would result in no bonus. During the midst of December, 2019, he came up with a plan to solve his problem. Copeland entered into a verbal agreement with another agricultural merchandiser, CaptShreve Inc., stipulating that on December 30, 2019, Rice Village would sell at cost $55 Million of existing inventory to CaptShreve for cash and issue Federal Warehouse Receipts, all supported by binding written contracts in accordance with legal requirements. This as a result would effectively reduce the inventory on Rice Village's December 31st Balance Sheet to the desired goal (although the physical inventory would remain in Rice Village's facility), and allow Copeland to earn the bonus. Then, on January 2nd, Rice Village would repurchase the inventory at the original selling price plus a premium equal to 1% of the original selling price ($550,000). Then, the issued Federal Warehouse Receipts would be cancelled when the repurchase agreement was executed, and the inventory would be reinstated to Rice Village's inventory accounts at the new and higher) value Each sale is consummated at arms-length'. That is, there is no related-party transactions - the cash transferred to RiceVillage from the customer equals to the fair market value of the inventory sold, and Rice Village transfers to the customer a Federal Warehouse Receipt, which represents the legally binding ownership transfer of the inventory. In the meantime of the transfer of Fedral Warehouse Receipt, Rice Village will record a sale of the inventory and no longer formally recognize the inventory on its financial statements. However, Rice Village is required by law to maintain a report showing both owned and non-owned inventory located at the facility. In addition, the law requires that the facility should maintain an inventory stock level that could ensure the delivery of the commodity. That is, total physical stocks in the facility are prohibited to fall below the amount owned by the purchaser until it is shipped to the purchaser. Once the purchaser receives all the contracted stocks, the Warehouse Receipt is cancelled and returned to Rice Village. The entire business transaction is legally supported by a formal written contract outlining all the specifics of the sales/purchase including quality, volume, dollar amounts and pricing and other conditions. Copeland's contract went through the required level for approval due to the size of the transaction. At this size of contract, Copeland himself was responsible for approving contracts. In response to several of Copeland's subordinates' questioning of the validity of the contract, Copeland told them that we can't do this was not a justification for cancelling the contract. Eventfully, the transaction was completed. During a routine internal audit, Copeland's transaction came under scrutiny by the head of the internal audit department, and top management was notified. Required: Analyze Copeland's plan of action. In particular, Were the transactions recorded in accordance with the Conceptual Framework's guideline? What qualitative characteristics, principles, and/or conventions are involved in your analysis? Does the transaction meet the requirements for revenue recognition according to U.S. GAAP? Please be specific. Donald Copeland is Rice Village senior executive officer, who is responsible for the planning and operations of a RiceVillage's storage facility. At the beginning of the fiscal year 2019, Copeland was assigned by the top management team the task of reducing the inventory by 20% of its carrying value in the beginning of the year. Copeland's compensation is tied to his performance, and as an incentive, successful completion of this task would ensure Mr. Copeland a bonus of 20% of Copeland's annual salary (a bonus amounting to over $50,000). Discuss any ethical and legal issues present. Were Copeland's action merely unethical or occupational fraud? Assume you are the CEO of Rice Village. How would you handle this case? Please be original and use your own word. Support your analysis with arguments and cite any references at the end of your analysis. Although meeting the goal to complete this task would be very attractive and rewarding, it is a very difficult task to Copeland. As of November 2019, the inventory reduction plan was not carried out successfully, falling short by around $50 Million in order to reach the goal. An arm's length transaction refers to a business deal in which buyers and sellers act independently without one party influencing the other. These types of sales assert that both parties act in their own self-interest and are not subject to pressure from the other party ACCT 725 - Intermediate Accounting - Project 1 REVENUE RECOGNITION AND ACCOUNTING ETHICS Synopsis ice Village, Inc. is an U.S. agricultural commodity R merchandising firm located in the southwest region with fiscal operations conducted on a calendar-year basis (i.e. fiscal year ending on December 31). The firm's core operating business involves buying and selling agricultural products such as rice and wheat and operates multiple storage facilities in states including Louisiana, Texas, and California. Rice Village registers each storage facility as a Licensed Federal Warehouse with the US Department of Agriculture, which allows each facility to maintain physical control of the agricultural commodities while selling all or a portion of the commodity inventory for cash. Such arrangements, as a result, effectively shift ownership of those sold inventory to the purchasing firm, and hence becoming consigned goods belonging to the purchaser. Copeland realized that the desired goal might not be realized, which would result in no bonus. During the midst of December, 2019, he came up with a plan to solve his problem. Copeland entered into a verbal agreement with another agricultural merchandiser, CaptShreve Inc., stipulating that on December 30, 2019, Rice Village would sell at cost $55 Million of existing inventory to CaptShreve for cash and issue Federal Warehouse Receipts, all supported by binding written contracts in accordance with legal requirements. This as a result would effectively reduce the inventory on Rice Village's December 31st Balance Sheet to the desired goal (although the physical inventory would remain in Rice Village's facility), and allow Copeland to earn the bonus. Then, on January 2nd, Rice Village would repurchase the inventory at the original selling price plus a premium equal to 1% of the original selling price ($550,000). Then, the issued Federal Warehouse Receipts would be cancelled when the repurchase agreement was executed, and the inventory would be reinstated to Rice Village's inventory accounts at the new and higher) value Each sale is consummated at arms-length'. That is, there is no related-party transactions - the cash transferred to RiceVillage from the customer equals to the fair market value of the inventory sold, and Rice Village transfers to the customer a Federal Warehouse Receipt, which represents the legally binding ownership transfer of the inventory. In the meantime of the transfer of Fedral Warehouse Receipt, Rice Village will record a sale of the inventory and no longer formally recognize the inventory on its financial statements. However, Rice Village is required by law to maintain a report showing both owned and non-owned inventory located at the facility. In addition, the law requires that the facility should maintain an inventory stock level that could ensure the delivery of the commodity. That is, total physical stocks in the facility are prohibited to fall below the amount owned by the purchaser until it is shipped to the purchaser. Once the purchaser receives all the contracted stocks, the Warehouse Receipt is cancelled and returned to Rice Village. The entire business transaction is legally supported by a formal written contract outlining all the specifics of the sales/purchase including quality, volume, dollar amounts and pricing and other conditions. Copeland's contract went through the required level for approval due to the size of the transaction. At this size of contract, Copeland himself was responsible for approving contracts. In response to several of Copeland's subordinates' questioning of the validity of the contract, Copeland told them that we can't do this was not a justification for cancelling the contract. Eventfully, the transaction was completed. During a routine internal audit, Copeland's transaction came under scrutiny by the head of the internal audit department, and top management was notified. Required: Analyze Copeland's plan of action. In particular, Were the transactions recorded in accordance with the Conceptual Framework's guideline? What qualitative characteristics, principles, and/or conventions are involved in your analysis? Does the transaction meet the requirements for revenue recognition according to U.S. GAAP? Please be specific. Donald Copeland is Rice Village senior executive officer, who is responsible for the planning and operations of a RiceVillage's storage facility. At the beginning of the fiscal year 2019, Copeland was assigned by the top management team the task of reducing the inventory by 20% of its carrying value in the beginning of the year. Copeland's compensation is tied to his performance, and as an incentive, successful completion of this task would ensure Mr. Copeland a bonus of 20% of Copeland's annual salary (a bonus amounting to over $50,000). Discuss any ethical and legal issues present. Were Copeland's action merely unethical or occupational fraud? Assume you are the CEO of Rice Village. How would you handle this case? Please be original and use your own word. Support your analysis with arguments and cite any references at the end of your analysis. Although meeting the goal to complete this task would be very attractive and rewarding, it is a very difficult task to Copeland. As of November 2019, the inventory reduction plan was not carried out successfully, falling short by around $50 Million in order to reach the goal. An arm's length transaction refers to a business deal in which buyers and sellers act independently without one party influencing the other. These types of sales assert that both parties act in their own self-interest and are not subject to pressure from the other party

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