Assignment
Travel-R-Us, Inc. (Travel) is a publicly-traded company with annual revenue of $370 million and a fiscal year ending May 31. Travel owns and operates three cruise ships serving Alaska, the Mediterranean, and the Bahamas. In addition, Travel has another division that provides vacation land tours in Europe and the United States. Amelia Emerson, the Controller and a CPA, requests advice from your accounting firm about a problem she is facing in her company.
The company's cruise line revenues are seasonal. The cruise ship tourism industry is highly competitive and capital intensive. During peak business periods, Travel's revenues have been substantially reduced in the past by adverse weather conditions, equipment failure, and the cost of fuel. The economy and high energy costs have impacted Travel's cruise line profits. For the last two years, Travel has operated at a loss.
In the current fiscal year, one of Travel's ships, the Rialto, was severely damaged by a hurricane during a voyage to the Bahamas in early September. Travel is a self-insured company. Rather than incur the cost to repair the Rialto, Travel has decided to sell the cruise line division and totally cease operations in that industry. The cruise line division will be sold to Admiral Cruise Line within the next twelve months. The Rialto part of the sale will result in a loss. But the sale of the division will result in a gain and convert what would have been another operating loss for Travel into a profitable year. The capital raised from the sale of the cruise line division will be used to expand Travel's land tour operations.
Amelia's problem arises over how to report the sale of the cruise ships and cruise line division. In a meeting she had with the CEO and CFO, the CEO wanted to report the total gain from the sale of the ships and the other net assets and the Rialto loss as part of normal operations. "No need to separate the profit on the financial statements and confuse the shareholders," he said. "Just bury it with our other revenue - no different than merely selling off some assets."
The CFO agreed that it would be more advantageous for the company bury the gain from the sale of the division with Travel's operating loss because the shareholders and financial analysts would believe that the company was now showing signs of being profitable. "It was the blasted weather conditions that led us to make the decision to sell the Rialto and get out of the cruise line business," the CFO said. "Combining it all with our other revenue will make it possible for us to meet our earnings target and thereby get our performance bonuses," he added with a grin.
Amelia disagrees with both executives, but did not want to argue at the meeting until she could support her position with absolute certainty. Amelia thinks she knows how to report the sale, but wants you to provide her with your recommendation. Amelia was only recently hired as the Controller of Travel and doesn't want to upset the CEO and CFO unnecessarily in case she is wrong. Even though it's Amelia's responsibility to decide how to report the sale, Amelia is tempted to let the CEO and CFO do what they want. However, she does not want to become involved with financial statements that violate GAAP and mislead the public.
Required:
Ignore "Pending Content." Don't include "Extraordinary Items" in your analysis because this standard and concept doesn't exist anymore.
Prepare a letter (not a memo) addressed to Amelia Emerson, Controller, Travel-R- Us, Inc., at 350 North Cruise Avenue, Palm Beach, FL 33480, advising her about how to account for the sale of the ships and cruise line division. You must support your advice by citing any applicable accounting standards. Do not include a reference page. You must limit your letter to one page (single spaced with double space between paragraphs) and one-inch margins. Only submit the one page and nothing else. Create your own letterhead for the accounting firm you represent. The date should be placed no less than one-half inch below the letterhead (or 1.5 inches from the top of the page).
In addition to analyzing the accounting issue(s) in your letter, include a brief comment about any ethical issue that Amelia faces. You should look at the AICPA Code of Professional Conduct rule on "Integrity and Objectivity". Briefly explain to Amelia the one part of this rule she should most consider in her current situation. But remember (and be careful) that the CEO and CFO may be "secondary readers" of your letter, and that you are creating a written record on this issue. Please note that it is Certified Public Accountants (CPAs) like Amelia who are "members" of the AICPA and must uphold the AICPA Code of Professional Conduct.
Additional Information
To access the applicable section of the AICPA Code of Professional Conduct, go to pages 31 and 32 of
https://www.aicpa.org/research/standards/codeofconduct/downloadabledocuments/2014december15contentasof2014may15codeofconduct.pdf
To cite and reference this rule, use the following:
Reference
American Institute of Certified Public Accountants, ET Section 1.100.001.01 (2017). Retrieved November 23, 2016.
In-text Citation
(AICPA, 2016, ET Section 1.100.001.01)
1. For Homework, use letterhead and proper letter format (see class web page).
2. Use direct organization (Write your main point first and follow with your reasons and support. Don't make the reader wait until the end for the point you are making.)
Introductory (Purpose) Paragraph
a. Connect with your audience.
b. Identify the issue(s).
c. Provide recommendation/conclusion.
Supporting (Detail) Paragraphs: The body should have one paragraph for each major issue or alternative.
a. 1st sentence - summarize the content of the paragraph.
b. Identify and weave the relevant facts into your analysis.
c. Cite sources to support analysis.
Goodwill Closing Paragraph
3. Avoid mentioning and discussing the executives-CEO & CFO.
4. Avoid offering opinions, discussing whistle-blowing, or lecturing about the possibility of Amelia losing her job or going to jail. Your letter should be about accounting advice.
Integrity - a character trait that relates to honesty (integer = wholeness). Looks beyond the letter of the law to its underlying spirit.
AICPA Code of Professional Conduct
In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others. Objectivity - a state of mind; imposes the obligation to be impartial, intellectually honest, and free of conflicts of interest.
Require to use FASB Accounting Standards Codification, The official source of authoritative, nongovernmental U.S. GAAP. As well. https://aaahq.org/ascLogin.cfm
In-text Citation
(FASB, 2016, ASC para. 605-10-25-1) or (FASB, 2016, ASC 605-10-25-1)
Reference (on reference page)
Financial Accounting Standards Board (FASB). (2016). Accounting Standards Codification (ASC) paragraph 605-10-25-1, Revenue Recognition - Overall - Recognition - Revenue and Gains. Retrieved November 2, 2016, from https://asc.fasb.org.
Attachment:- FASB_Rules.rar