Dry Clean Depot Limited Essay Sample

Overview:
Dry Clean Depot is a private company. Max the CFO has asked me ( Professional Accountant ) to analyze any accounting deductions with sing a new loan and other issues within the company. Dry Clean Depot Limited ( DCDL ) has elected to describe under the restraints of IFRS. although they could hold elected ASPE as their coverage criterions. since they are a private company. DCDL is a company with 40 dry cleansing shops in southern Ontario. DCDL has grosss of about $ 7 Million. DCDL has arranged for a $ 2. 000. 000 loan for the purchase of some new equipment for the concern. The compacts of the new loan are as follows: * Maximum 2-to-1 debt-to-equity ratio

* Minimum hard currency balance of $ 500. 000
* Maximum dividends of $ 100. 000 per twelvemonth

Issues:
Lease:
IFRS states that “An burdensome contract is a contract in which the ineluctable costs of run intoing the duties under the contract exceed the economic benefits expected to be received under it. ” The rental of the Sudbury retail location is hence an burdensome contract. DCDL has an duty to pay $ 27. 500 per twelvemonth for the rental on the Sudbury location. The sub-contract understanding DCDL has is a sub-lease that pays $ 5. 000 for twelvemonth one. and $ 5. 000 each twelvemonth for the following three old ages. plus 10 % of gross revenues over $ 150. 000. A liability of the difference $ 27. 500 and $ 5. 000 will necessitate to be recorded $ 22. 500/ twelvemonth. today. in conformity with the clip value of money ; as this is a present duty of the company. IFRS states that a liability will necessitate to be recorded. This would decline the debt-to-equity ratio. which is non aligned with management’s aims. Contamination Issue:

DCDL uses perchloroethylene ( perc ) in its cleansing procedure in eight of its operating sites. This chemical is a risky air contamination. There is an duty for the cost of redress if there is a taint issue in any of the sites. One of the eight sites may hold a taint issue. and may hold some redress work needed. A liability will necessitate to be set up. in conformity with IFRS. if there a present duty for redress. the costs musts be estimated based on historical informations ( $ 250. 000 to $ 500. 000 ) . The liability must be set up consequently and discounted on the clip value of money. A note revelation is besides recommended sing this liability and its possibility. The clean-up costs of resigning the premises contingent on the taint issue will besides be needed to be evaluated and recognised. This liability will decline the compact of debt-to-equity. New Loan:

The loan of $ 2. 000. 000 is being used to buy equipment for the concern. harmonizing to IFRS this loan can be capitalized. moreover all the adoption costs such as involvement payments ( measured utilizing the effectual involvement rate method ) and the upfront fee of $ 377. 000 can besides be capitalized in conformity with IFRS. IFRS ( IAS23 ) states that “An entity shall capitalize adoption costs that are straight attributable to the acquisition. building or production of a qualifying plus as portion of the cost of that plus. ” Therefore. the involvement payments and the upfront fee may be capitalized. This will profit the aim of lower debt-to-equity ratio. After the acquisition period the involvement payments will be expensed. Cost of Equipment:

The undermentioned costs of the equipment will be capitalised. in conformity with IFRS:
* The invoice monetary value of $ 2. 450. 000.
* The involvement cost before the acquisition
* The transportation cost of $ 34. 000
* The responsibility to be paid: 20 % ten 2. 450. 000 = $ 490. 000
* Installation of the equipment: $ 17. 000
* Labour and supplies during the testing: $ 21. 000

The adoption costs and cost of equipment that is capitalised must be disclosed in the notes to the fiscal statements. Capitalizing these costs will break the debt-to-equity ratio. Prepaid Card Revenue Recognition:

DCDL in the month of March offered clients the option of purchasing prepaid cards for their services. Customers could purchase $ 100 card and have $ 120 worth of dry cleansing services. DCDL has recognised the $ 120 as a liability ( unearned gross ) . Face value of the cards sold so far is $ 468. 000 ; $ 78000 ( 20 x 3. 900 cards ) has been recorded as an disbursal. This thought of postpaid cards is fundamentally the construct of a gross revenues price reduction. Alternatively of write offing the full $ 78. 000 the sum estimated. used in this period must be recognised. This sum must be recorded as a contra gross revenues account in the fiscal statements and non as publicity disbursal.

The $ 342. 000 of prepaid cards used must be recorded as gross less any price reductions that clients have taken. as it meets all the public presentation standard. harmonizing to IFRS. Max expects 5-10 % of the value of the cards ne’er to be used. This statistic should non be taken into consideration unless the company has some historical grounds to endorse up these figures. This is a new plan for DCDL. so these figures will non be used. as IFRS states that gross demands to be moderately measured before being recognised. The acknowledgment of the gross and decreased disbursal both better the debt-to-equity ratio of DCDL and are aligned with the aims of the company in geting the loan. Decision:

Harmonizing to the issues discussed supra. the gross acknowledgment of the prepaid cards betters the compact for the loan. but the lease issue worsen the ratio.