Practice Cases for Midterm Fall 2015 Intermediate One

PRACTICE CASE ONE

Highways Incorporated (HI) is a private corporation in the construction business focusing
primarily on the construction of highways. They have been in business for over 30 years.
HI is primarily owned by the OCallaghan family with a few outside shareholders. None
of the outside shareholders are actively involved in management. To motivate their
management staff there is a bonus plan based on net income from continuing operations.
In the past few years, due to a government cutback in the construction of highways they
have had little or no profits. There is a loss anticipated for 2015. To help raise financing
for their operations and HI obtained a loan from Big Bank. The bank loan has a
maximum debt to equity ratio that can not be exceeded based on the annual audited
financial statements. The loan is payable on demand if the loan is violated.
HI has hired you as their accounting policy analyst. You have been asked by the CEO to
discuss alternatives and provide recommendations on the appropriate accounting policies
for events that have occurred during 2015.
1. HI bids on construction contracts for highways with the Provincial Government. The
lowest bidder is awarded the contract based on meeting certain specifications. HI was
awarded two major construction contracts during 2015. HI is paid 10% on being
awarded the contract with the remainder paid evenly every six months. The first
contract was awarded in the spring 2015 to expand 200 kms of the QEW. The contract
is worth $10 million and estimated to take three years. Total costs are estimated to be
$8 million and HI had built 80 kms by the end of Dec 2015 and spent $5 million. The
second contract was a five year contract worth $20 million dollars to expand 500 kms
of highways in Northern Ontario. The contract was awarded in October 2015 to be
started in the spring of 2016 due to snow. It is estimated that the construction costs
will be $15 million. Up until Dec 31, HI had spent $4 million obtaining supplies and
equipment.
2. In addition, to highway construction HI used to be in the snow removal business.
They had a contract with the City of Toronto to remove snow on major highways.
Due to heavy competition in July 2015 the Board of Directors made a decision to get
out of this business. From Jan-April they had profits of $200,000 related to this
business. HI is currently looking for buyers for its snow removal equipment. The net
book value at Dec 31, 2015 was $750,000. An appraisal indicated the value had
declined to $500,000.
3. A lawsuit was launched in 2015 against HI for $1 million by a number of motorists
whose car was damaged from rock following blasting (dynamite used to remove rock)
to widen the highway. Lawyers for HI are positive that there will be minimal
settlements.

4. HI purchases gravel and other materials for construction from Gravel Pit Incorporated
(GPI). GPI is owned by one of the Board members of HI. HI has been provided a
10% discount on volume purchases. GPI normally offers its customers discounts
between 5-12% depending on the volume purchased.
5. To conserve cash HI entered into an agreement with Construction Equipment
Incorporated (CEI). CEI gave HI a large piece of construction equipment with a
normal selling price of $200,000 in exchange for road construction work they
required on their property. The work will be completed by HI in 2015.
Copyright Canada 2010, L & E Consulting Ltd.

PRACTICE CASE TWO

Feed Incorporated (FI) is a very profitable family owned private corporation that
manufactures and supplies nutrients and fertilizer for the farming industry. FI has no
desire to go public. FI operates in North America. In 2015 FI initiated a bonus plan.
Financing is obtained through issuing shares and bank financing. FI has a bank loan with
Big Canadian Bank. The bank requires annual audited financial statements and has a
financial covenant with a maximum debt to equity ratio.
You have recently been hired to develop new accounting policies for FIs Dec 31 yearend. You have been asked by the owners to discuss alternatives and provide
recommendations on the appropriate accounting policies for events that have occurred
during 2015.
1) FIs customers range from small to large agricultural producers. Some farms are
operated by a single owner and others are incorporated. A farm can purchase a small
quantity of produce while a large farming operation may enter a long term supply
contract. If a farm purchases over a specified volume in a two year period they obtain
a rebate. This rebate is cash back that can be kept by the farm or used as a credit
towards future purchases. FIs products also offer a 100% money back guarantee. If
the product does not achieve results there is a 100% money back guarantee. Since
some years are good and others are bad farmers have until 30 days after harvest to
pay for their purchases.
2) In 2015, FI decided to reorganize their operations. FIs board announced that they
were going to get out of their Finance Division. This division would help arrange
financing for farmers. This operation had a loss of $2 million in 2015 since there were
a high number of crop failures and a number of farmers were unable to make
payments on their loans. This division has assets with a net book value of $165
million and a fair value of $150 million on Dec 31, 2015. FI is looking for a buyer
and anticipates selling at a loss of $5 million in 2016.
3) FI has a lawsuit launched by a farmer saying that the fertilizer had ruined the soil on
the farm. To avoid negative publicity FI decided to settle out of court. They are
currently negotiating an amount. FIs lawyers estimate a settlement will be between
$.5 and $2 million.
4) During 2015, FI sold a piece of land to one of their subsidiaries SI. The land had a
carrying amount of $500,000. SI paid cash of $1 million for the land. The value was
established by taking the average of three appraisals by real estate agents.
5) On February 10, 2016 FI had a fire destroy one of their storage facilities. Damages
were extensive and estimated to be $5 million.
Copyright Canada 2011, L & E Consulting

PRACTICE CASE THREE

Highways Incorporated (HI) is a public corporation in the construction business focusing
primarily on the construction of highways. They have been in business for over 30 years.
To motivate their management staff there is a bonus plan based on net income from
continuing operations.
In the past few years, due to a government cutback in the construction of highways they
have had little or no profits. There is a loss anticipated for 2015. To help raise financing
for their operations and HI obtained a loan from Big Bank. The bank loan has a
maximum debt to equity ratio that can not be exceeded based on the annual audited
financial statements. The loan is payable on demand if the loan is violated.
HI has hired you as their accounting policy analyst. You have been asked by the CEO to
discuss alternatives and provide recommendations on the appropriate accounting policies
for events that have occurred during 2015.
6. HI bids on construction contracts for highways with the Provincial Government. The
lowest bidder is awarded the contract based on meeting certain specifications. HI was
awarded two major construction contracts during 2015. HI is paid 10% on being
awarded the contract with the remainder paid evenly every six months. The first
contract was awarded in the spring 2015 to expand 200 kms of the QEW. The contract
is worth $10 million and estimated to take three years. Total costs are estimated to be
$8 million and HI had built 80 kms by the end of Dec 2015 and spent $5 million. The
second contract was a five year contract worth $20 million dollars to expand 500 kms
of highways in Northern Ontario. The contract was awarded in October 2015 to be
started in the spring of 2016 due to snow. It is estimated that the construction costs
will be $15 million. Up until Dec 31, HI had spent $4 million obtaining supplies and
equipment.
7. In addition, to highway construction HI used to be in the snow removal business.
They had a contract with the City of Toronto to remove snow on major highways.
Due to heavy competition in July 2015 the Board of Directors made a decision to get
out of this business. From Jan-April they had profits of $200,000 related to this
business. HI is currently looking for buyers for its snow removal equipment. The net
book value at Dec 31, 2015 was $750,000. An appraisal indicated the value had
declined to $500,000.
8. A lawsuit was launched in 2015 against HI for $1 million by a number of motorists
whose car was damaged from rock following blasting (dynamite used to remove rock)
to widen the highway. Lawyers for HI are positive that there will be minimal
settlements.

9. HI purchases gravel and other materials for construction from Gravel Pit Incorporated
(GPI). GPI is owned by one of the Board members of HI. HI has been provided a
10% discount on volume purchases. GPI normally offers its customers discounts
between 5-12% depending on the volume purchased.
10. To conserve cash HI entered into an agreement with Construction Equipment
Incorporated (CEI). CEI gave HI a large piece of construction equipment with a
normal selling price of $200,000 in exchange for road construction work they
required on their property. The work will be completed by HI in 2015.
Copyright Canada 2010, L & E Consulting Ltd.

PRACTICE CASE TWO

Feed Incorporated (FI) is a very profitable public corporation that manufactures and
supplies nutrients and fertilizer for the farming industry. FI has no desire to go public. FI
operates in North America. In 2015 FI initiated a bonus plan.
Financing is obtained through issuing shares and bank financing. FI has a bank loan with
Big Canadian Bank. The bank requires annual audited financial statements and has a
financial covenant with a maximum debt to equity ratio.
You have recently been hired to develop new accounting policies for FIs Dec 31 yearend. You have been asked by the owners to discuss alternatives and provide
recommendations on the appropriate accounting policies for events that have occurred
during 2015.
6) FIs customers range from small to large agricultural producers. Some farms are
operated by a single owner and others are incorporated. A farm can purchase a small
quantity of produce while a large farming operation may enter a long term supply
contract. If a farm purchases over a specified volume in a two year period they obtain
a rebate. This rebate is cash back that can be kept by the farm or used as a credit
towards future purchases. FIs products also offer a 100% money back guarantee. If
the product does not achieve results there is a 100% money back guarantee. Since
some years are good and others are bad farmers have until 30 days after harvest to
pay for their purchases.
7) In 2015, FI decided to reorganize their operations. FIs board announced that they
were going to get out of their Finance Division. This division would help arrange
financing for farmers. This operation had a loss of $2 million in 2015 since there were
a high number of crop failures and a number of farmers were unable to make
payments on their loans. This division has assets with a net book value of $165
million and a fair value of $150 million on Dec 31, 2015. FI is looking for a buyer
and anticipates selling at a loss of $5 million in 2016.
8) FI has a lawsuit launched by a farmer saying that the fertilizer had ruined the soil on
the farm. To avoid negative publicity FI decided to settle out of court. They are
currently negotiating an amount. FIs lawyers estimate a settlement will be between
$.5 and $2 million.
9) During 2015, FI sold a piece of land to one of their subsidiaries SI. The land had a
carrying amount of $500,000. SI paid cash of $1 million for the land. The value was
established by taking the average of three appraisals by real estate agents.
10) On February 10, 2016 FI had a fire destroy one of their storage facilities. Damages
were extensive and estimated to be $5 million.
Copyright Canada 2011, L & E Consulting