ACTBAS2 INDIVIDUAL BUSINESS CASE 2nd Term, School Year 2011-2012

Source: Porter, G., and Norton, C. Financial Accounting: The Impact on Decision Makers. 5 th edition. (Modified)

GREEN VALLEY COMPANY, founded five years ago by its president Roy Alvarez, is a mediumsize real estate company. GVC has enjoyed tremendous growth since its inception by aggressively seeking out listings for residential real estate and paying a very generous commission to the selling agent. GVC receives a 6% commission for selling a clients property and gives two-thirds of this, or 4% of the selling price, to the selling agent. For example, if a house sells for P1,000,000, GVC receives P60,000 and pays P40,000 of this to the selling agent. At the time of the sale, the company records a debit of P60,000 to Accounts Receivable and a credit of P60,000 to Sales Revenue. The accounts receivable is normally collected within 30 days. Also, at the time of sale, the company debits P40,000 to Commissions Expense and credits Commissions Payable for the same amount. Sales agents are paid by the 15th of the month following the month of sale. In addition to the commissions expense, GVCs other two major expenses are advertising of listings in local newspapers and depreciation of the companys fleet of BMWs (Carlos Martinez, vice president of sales, has always believed that all of the sales agents should drive BMWs). The newspaper ads are taken for one month, and the company has until the 10 th of the following month to pay that months bill. The automobiles are depreciated over four years (Mr. Martinez doesnt believe that any salesperson should drive a car that is more than four years old). Due to a downturn in the economy, sales have been sluggish for the first 11 months of the current year, which ends on June 30. President Alvarez is very disturbed by the slow sales this particular year because a large note payable to the local bank is due in July, and the company plans to ask the bank to renew the note for another three years. Mr. Martinez seems less concerned by the unfortunate timing of the recession and has some suggestions as to how they can paint the rosiest possible picture for the banker when they go for the loan extension in July. In fact, he has some very specific recommendations for you as to how to account for transactions during June, the last month in the fiscal year. You are the controller for GVC and have been treated very well by President Alvarez and Vice President Martinez since joining the company two years ago. In fact, Mr. Martinez insists that you personally drive the top-of-the-line BMW. Following are his suggestions:

First, for any sales made in June, we can record the 6% commission revenue immediately but delay recording the 4% commission expense until July, when the sales agent is paid. We record the sales at the same time we always have, the sales agents get paid when they always have, the bank sees how profitable we have been, we get our loan, and everybody is happy! Second, since we wont be paying our advertising bills for the month of June until July 10, we can just wait until then to record the expense. The timing seems perfect, given that we are to meet with the bank for the loan extension on July 8.

Third, since we will be depreciating the fleet of BMWs for the year ending June 30, how about just changing the estimated useful life on them to eight years instead of four years? We wont say anything to the sales agents; no need to rile them up about having to drive their cars for eight years. Anyhow, the change to eight years would just be for accounting purposes. In fact, we could even switch back to four years for accounting purposes next year. Likewise, the changes in recognizing commission expense and advertising expense dont need to be permanent either; these are just slight bookkeeping changes to help us get over the hump!
CASE OUTLINE: I. Introduction (Provide a brief introduction either about the case or about any accounting topic previously learned which is related to the case. One to two pages only.) II. Discussion (This is the bulk of your paper. Incorporate in this section your answers to the following questions listed below. Copy the questions first before answering.) (1) Explain why each of the three proposed changes in accounting will result in an increase in net income for the year ending June 30. (2) Identify any concerns you have with each of the three proposed changes in accounting from the perspective of generally accepted accounting principles. If these changes are made, do the financial statements faithfully represent what they claim to represent? Are these changes merely bookkeeping changes? (3) Identify any concerns you have with each of the three proposed changes in accounting from an ethical perspective. Do the proposed changes provide information that is free from bias? (4) Does the controller benefit by making the proposed changes? Are outsiders harmed? Explain your answer. III. Conclusion (Include here whether or not you, the company controller, would make the proposed changes. Why or why not? You may also include other findings/realizations about the case.) IV. Recommendation (Include here alternatives/suggestions/recommendations to the company management in order to attain its objective.) V. Bibliography (if applicable) FORMAT: (1) Paper size: 8.5 x 11 (2) Margin: 1 on all sides (3) Font and font size: Tahoma 11 (4) Paragraph alignment: Justified (5) Paragraph spacing: Double-spaced (6) Length of written report: ____ pages, excluding cover page and attachment/s (placed at the end of the report) (7) Attachment/s: A copy of this business case, plus other attachments, if any (8) Insert the entire report (together with attachments) in a short sliding folder.

(9) Deadline for submission: MH class: ___________________ TF class: October 25, 2011 WS class: ___________________ (10) The cover page should be as follows:

GREEN VALLEY COMPANY A Business Case Presented to the The Faculty of the Accountancy Department In partial fulfillment Of the course requirements In ACTBAS2 ______________________ Surname, First Name, M.I ________ Section _______________________ Date