Growcorp. Ltd., a corporate farming processing venture was established on January 1, 2004. During its first crop year, March to October 2004 the company raised crops under contract for a large retail food chain and froze and packaged those crops under the retail firm’s private brand name. The contract called for the release of the inventory from Growcorp Ltd. To the retailer as requested by the latter during 2005. The entire crop was warehoused by Growcrop Ltd. Upon packaging during September and October and it was expected that the first shipments would be made during January of 2005.
On January 10, 2005 the accounts of Growcorp Ltd. For 2004 were being finalized and a debate was taking place between the treasurer and controller of the company as to how to account for the crop revenue and related costs for the 2004 crop year. The controller was arguing for recognition of ...view middle of the document...
We sure can’t call it revenue now.”
As the company’s auditor, what policy choice would you recommend. Present argument(s) to support your position.
Issues to consider:
i) Identify the generally accepted accounting principles(s) involved in the positions being argued before the fire.
The first accounting principle involved in the positions being argued is the Revenue Recognition Principle because it states that revenue is recognized when merchandise, goods or services or other assets are exchanged for cash or claims for cash. Growcorp’s contract with the retailer was created during 2004, however there wasn’t any exchange for cash or claims for cash; therefore the revenue cannot be recognized. Another principle involved in this case is the matching principle which states that the costs incurred during that period should be matched against the revenue generated in the same period. Since Growcorp will not be recognizing any revenue with the Revenue Recognition Principle in effect, they cannot incur any costs in the income statement.
ii) Precisely, what went up in smoke
The loss that Growcorp is faced with will be the inventory in the storage facility. The revenue is still left unrecorded on the day of the incident therefore the only asset that they lost is the inventory on hand.
iii) Ignoring the fire, which position is best supported by the principles(s) identified given the facts provided? (Explain why?)
The treasurer’s position is best supported by the principles because the stock did not change hands yet and the inventory was still at their warehouse. The buyer did not make any payments yet either therefore the unearned revenue is still a liability until the goods are delivered.
iv) What effect, if any, does the fire have on the accounting issue being debated and your recommendations.
The fire is going to put the producer at a loss since they will be losing an asset. In this case, the producer’s inventory is covered under an insurance plan which transfers the loss to the insurance company. My recommendations are to...?