Alpine Perceptions Ltd.

Alpine Perceptions Ltd. (APL) provides “technology solutions” tomanufacturing companies. APL is a wholly owned subsidiary ofElevation Technologies Inc. (Elevation), a privately ownedconglomerate. In 2016 APL was performing poorly and Elevationconsidered selling the company for the best offer. As a last resortElevation hired turnaround specialist Kendal Wilson to moreeffectively manage and salvage APL. Ms. Wilson’s employmentcontract specifies that in addition to an annual salary she wouldreceive a $1 million cash bonus after the end of the 2019 fiscalyear if APL meets a number of performance goals over the 2017 to2019 period. For 2017 and 2018 APL achieved the goals. To meet theperformance goals for 2019 APL must report net income in excess of$20 million.

It’s now January 25, 2020. APL’s financial statements for theyear ended December 31, 2019 have been received at Elevation’scorporate offices. APL’s net income for 2019 is $20,550,000.Elevation’s CFO has examined the financial statements and issatisfied with most aspects of them but is concerned with thereporting of some transactions and economic events. The issues ofconcern are described below:

1. On May 30, 2019 the company made a payment of $250,000 to acomputer hacker who obtained access to the computer code to APL’sproprietary software that is used to produce some of APL’sproducts. The hacker had given the company ten days to pay or shewould sell the information to a competitor. Management believedthat if the information was obtained by a competitor it would havesignificant negative consequences for the company. APL hascapitalized the amount of the payment and is amortizing it over theremaining life of the related assets, which is about fouryears.
2. APL has always shut down for one week in late December forroutine maintenance of the company’s equipment. The annualmaintenance is essential to ensure that the equipment can meet theprecise specifications of customers. For the past three years,maintenance has been completed by the end of December. The annualmaintenance originally scheduled for December 2019 was delayeduntil the first week of January 2020 because of scheduling problemswith the company that does the maintenance and because APL had anumber of contracts it wanted to complete by the end of December.The last maintenance was done in December 2018. APL paid $425,000for the January 2020 maintenance work. The amount was paid inmid-January.
3. In October 2019 APL settled a lawsuit by an employee from anincident that occurred in 2015. APL agreed to pay the employee$350,000 and the payment was made on November 12, 2019. APLaccounted for the settlement and payment by crediting cash anddebiting retained earnings for $350,000. It was explained thatsince payment pertained to an incident in 2015, income in 2019shouldn’t be affected.

The CFO has asked you, an accountant in the finance department,to prepare a report evaluating the issues. Ms. Wilson has alreadycalled the CFO to arrange a meeting to discuss the financialstatements and the payment of the bonus. The CFO wants your reportto explain the problem in each issue, identify reasonablealternatives, and provide full support for yourrecommendations.

1. For each transaction:
   1. Identify and explain the issue;
   2. Explain the impact of the method the preparer used to accountfor the transaction or economic event (how does the accounting foreach issue affect the parties involved).
   3. Evaluate the accounting used for each issue. Do you think it’sappropriate (explain why or why not)? (To do this you need to applyyour knowledge— definitions of elements, etc.).
   4. Is there a better (more appropriate, different) treatment thatcould be used for the transaction? If there is a betteralternative, provide support. Support means referring toappropriate criteria, definitions, standards, etc. as well as tothe facts defining the transaction/economic event. If the treatmentcurrently used is appropriate, explain why. When thinking about theexisting and alternative accounting treatments, be sure to keep inmind the interests of your client.
   5. Calculate/ (State) the impact of any changes you propose.
   6. Make a recommendation.