Question

TECH PROGRAM INCORPORATED

Tech Program Incorporated (TP) is a private corporation formed in the 1990s. TP develops and sells software for many purposes; theft recovery, geomapping, date and devise security, and IT asset management. To help motivate management, TP has a stock option plan.

To help fund continued software development, TP has a bank loan with a major bank. The bank requires annual audited financial statements and has a financial covenant that stipulates a minimum current ratio.

TP has an expected taxable loss of $ 10,000,000 in 20X9. For the last three years the company has had taxable profit of $ 2,000,000 in 20X6; 5,000,000 in 20X7, and $ 1,000,000 in 20X8. TP taxable loss this year was due to intensive development of new software for security over personal data. TP anticipates sales of this product to be significant due to concerns over identity theft.

You have recently been hired to develop new accounting policies for TP's December 31 year-end. You have been asked by the two owners to discuss alternatives and provide recommendations on the appropriate accounting policies for events below that have occurred during 20X9. Where possible, you have been asked to quantify the impact of the accounting policies. TP is seriously considering going public next year and would like to know how your recommendations would be different if it was a public company. The incremental borrowing rate for TP is 10%.The rate taxes for the last few years were 20X6 (38%), 20X7 (39%), both 20X8 and 20X9 (40%).

1. TP offers computer theft recovery and secure asset-tracking services. These services are provided for a period of one to five years. The customer pays a fee that includes software, monitoring and maintenance. The fee is due 30 days after installation of the software. Sales stuff are paid a commission based on the number of service contracts they sell.

2. TP offers a warranty with its theft recovery software. If a computer equipped with the software is stolen and TP is unable to recover the stolen software using its software or delete data on the stolen computer then the computer is eligible for a warranty of up to $ 1,000. To qualify, customers must file a police report. The amount of the warranty depends on the value of the stolen computer. Estimated warranty liabilities on the balance sheet at the end of 20X8 were$ 8 million. During 20X9, the estimated warranty costs based on a percentage of sales will be an additional $ 5 million. Actual warranty cost during 20X9 were $ 1 million.

3. TP currently uses the tax payable method of accounting for income taxes. In 20X8 TP changed its method of accounting for software development from expensing to capitalizing as an intangible asset.

Required

Perform the following tasks for this case:

1. Provide an overall assessment of the corporate financial reporting objectives.

2. Identify the ethical challenge for the accountant who must, as part of TP's management team, make recommendations with respect to accounting policy.

3. Analyze the issues, and provide recommendations and adjustments. Begin this segment with a list of the issues.