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ACTG 3120 Boats Incorporated Case Study

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Accounting

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Midterm case practice
Boats Incorporated
Constraints: Since BI is a private company, BI will have to follow under ASPE reporting standard.
Bank loan: as BI borrowed bank loans from Canada Bank, the bank may specify a certain debt
to equity ratio or current ratio for BI to maintain.
Blake:
Users and objectives:
1) Revenue Recognition
This issue is regarding the revenue recognition of the wooden boats. The contract between BI
and the customers is formed when both parties enter into an agreement for transaction. The
price is determinable as the boat has a price ranged between $500,000 and $ 2 million. The
performance obligation is to build the wooden boats and deliver them to the customer so the
ownership of the boats is fully transferred to the customer’s hands. The collection is also
probable as there exists a non-refundable deposit of 20% when the boat is ordered. Since the
boats take between 1 to 2 years to complete, BI can adopt the percentage of completion
method and recognize revenue proportionately over the period of construction based on the
cost that is incurred during the construction stage.
2) Unearned Revenue
As there exists a 20% non-refundable deposit of the boats, SI should accrue the unearned
revenue and hold the money until the boat is created.
3) Service type warranty VS Assurance type warranty
This issue is regarding whether the warranty is a service type warranty or assurance type
warranty. Based on the case facts, BI’s waterski and wakeboard boats come with a two-year
warranty, this is considered assurance type warranty as it comes with the boat when the
customer purchases it. Therefore, no separate performance obligation exists in assurance type
warranty. On the other hand, when the customer chooses to purchase an extended warranty,
this becomes a service type warranty as the customer will be receiving additional years of
warranty, thus, a separate performance obligation exists.
4) Storage cost
As BI is
5) Borrowing cost
This issue is regarding whether the new manufacturing facility is qualified as a qualifying asset
to be capitalized under borrowing cost. The new manufacturing facility is a nonfinancial asset, it
takes a substantial time of around 1 year to be completed, and BI is intended to use the facility
to accommodate the new manufacturing of waterskiis and wakeboards. Therefore, the facility
is qualified as a qualifying asset and the $1.6 million construction costs should be capitalized.
6) Bank loan

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7) Convertible bond debt VS equity
This issue is regarding whether the convertible bond is considered debt or equity. As BI has the
option of converting the bond into preferred shares, the convertible bond is considered as
equity.
FV = 1,000,000
N = 10
i/r = 4%
EIR = 4%
Semi-annially
Company’s option
PMT = 1,000,000 * 4% = 40,000
PV = (FV, p/f, n=10, r=4%) + (FV, p/a, n=10, r=4%)
PV = (1,000,000 * 0.67556) + (40,000 * 8.1109)
PV = 675560 + 324436
PV = 999996
Dr. Cash 1,000,000
Cr. Interest liability 324436
Cr. Share equity 675564
Dr. Interest expense 12977 (324436*4%)
Cr. Interest liability 12977
Dr. Interest liability 40,000
Cr. Cash 40,000
8) Forward contract
This issue is regarding the forward contract for entering into an agreement on a specific
exchange rate.

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Midterm case practice Boats Incorporated Constraints: Since BI is a private company, BI will have to follow under ASPE reporting standard. Bank loan: as BI borrowed bank loans from Canada Bank, the bank may specify a certain debt to equity ratio or current ratio for BI to maintain. Blake: Users and objectives: 1) Revenue Recognition This issue is regarding the revenue recognition of the wooden boats. The contract between BI and the customers is formed when both parties enter into an agreement for transaction. The price is determinable as the boat has a price ranged between $500,000 and $ 2 million. The performance obligation is to build the wooden boats and deliver them to the customer so the ownership of the boats is fully transferred to the customer’s hands. The collection is also probable as there exists a non-refundable deposit of 20% when the boat is ordered. Since the boats take between 1 to 2 years to complete, BI can adopt the percentage of completion method and recognize revenue proportionately over the period of construction based on the cost that is incurred during the construction stage. 2) Unearned Revenue As there exists a 20% non-refundable deposit of the boats, SI ...
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