Case Study Questions
in September. Your company now believes that collection of the missed payments is extremely unlikely.
Your company has already issued financial statements to lenders (for the period ending 12/31/X1) which
reflected revenue and a corresponding account receivable related to this customer of $10,000 per month for services
provided to this customer. Those financial statements also reflected the company’s standard allowance (reserve)
amount on receivables, of 4% of sales. In total, your company’s average monthly sales amount to $500,000.
1. Evaluate whether receipt of this information indicates you have a change in accounting estimate or whether
the customer’s bankruptcy should result in this event being considered an error in previously issued financial
2. Next, describe the accounting treatment (as required by the Codification) for each alternative, then support your
explanations with draft journal entries.
3. Finally, briefly state which treatment appears to be more appropriate given the circumstances. If you must make
any assumptions in reaching this conclusion, state these.
Determining Whether to Adopt the Goodwill Accounting Alternative Available to Private Companies Facts:
Smith Brothers, Inc. is a privately-owned corporation that manufactures and sells exterior window shutters. Opened
and privately-owned by two brothers in 2000, Smith Brothers began with a single retail outlet and has since expanded
to be the #1 seller and manufacturer of shutters in the entire southern United States. This success has been fueled not
only by adding new stores, but also through targeted acquisitions of competing small businesses in key states across
the south. As consideration for certain of these acquisitions, in addition to cash payments, the brothers privately sold
shares of the company, for an external ownership stake amounting to 15%. In recent years, to reward select company
executives for strong performance, the company has also given select key executives a combined 5% ownership in
the company. As of 2015, the brothers each owned 40% of the company, and the aforementioned external owners own
20% of the company. Shares are subject to restrictions on transfer, as they must first be offered to the brothers, then
to other existing shareholders. The brothers must approve any sales of shares to outside parties.
Given its rapid expansion, Smith Brothers has not ruled out the possibility of one day taking their company
public through an IPO. Doing this would give the company the cash to grow at a more rapid pace, through additional
targeted acquisitions. However, for now, the company is privately-held and prepares GAAP financial statements as
required by three of its bank lenders. Its existing bank loans were solicited through a competitive bidding process, in
3.83/7/2018 Additional References
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Chapter 3 | The Research Process
which a third-party broker matched Smith Brothers with the bank willing to offer it the lowest interest rates on borrowed funds. Smith Brothers does not currently file financial statements with the SEC or other regulators.
As a result of its past acquisitions, Smith Brothers has a considerable amount of recorded goodwill on its financial statements. Smith Brothers is aware that the FASB, working with the recently created Private Company Council
(PCC), recently released an alternative allowing private companies to amortize their goodwill, and Smith Brothers is
considering whether to adopt this alternative. Amortizing, rather than impairment testing, its goodwill is expected to
save the company approximately $20,000 in fees paid annually to valuation specialists.
Required: You are an associate in the accounting advisory practice of a public accounting firm. Smith Brothers periodically engages your team to assist in accounting for the company’s acquisitions. Today, Smith Brothers has asked
for your team’s assistance in evaluating the appropriateness, and possible ramifications, of employing this private
company alternative. In doing so, you must address the following questions:
1. First, locate this recently-issued standard from the FASB. What is the name of this standard? Where is this guidance codified in the FASB Codification? What entities are eligible to apply the guidance in this standard?
2. Is Smith Brothers, specifically, eligible to apply this standard?
3. What is the transition/effective date for applying this alternative? Also, is there a certain date by which Smith
Brothers must make this election?
4. If Smith Brothers were to elect this accounting alternative, describe how the company would account for and
present its goodwill.
5. Would such a change be considered a change in accounting principle, and what are the implications of this? To
respond, you will need to consult a separate topic within the Codification.
6. What other counsel would you give Smith Brothers, related to application of this accounting alternative? Said
another way, what other considerations might be useful for Smith Brothers related to this or other private company alternatives? (There is no single, correct answer. Just think about other implications of this decision, or
other considerations you might pass along to management.)
Evaluate each of the above-listed issues for Smith Brothers management, citing excerpts from the relevant ASU (or
from the Codification) as applicable.
You Create the Case (Applying the Accounting Research Process) On your own, create a fictitious fact pattern
(accounting problem/business issue) to which you can apply the accounting research process. If you are able, use a
fact pattern based on a real situation that you’ve encountered professionally (such as from a work experience or an
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