Case Assignment 1 - Case

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Feb 20, 2024

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MGAC01 – Case Assignment 1 2021 Fall Due Date : October 17, 2021 (Sunday) Mullin Digital is public company li st e d on t h e T o r o n to Stoc k E xcha n g e . Mullin provide digital solutions to companies in the banking industries. The company has been growing steadily over the years. T h e co m pany's sha r es hav e ris e n sharply i n pric e ov e r th e past t wo y e a r s, driv e n m a i n l y by the str e ngth and growth in the banking industry. Stock a n a l ysts h ave been very e n t husiastic abou t Mullin’s sha r es and analysts hav e issu e d v e ry favourab l e earnings fo r ecasts for Mullin’s 2021 ye ar - e n d results . I n 20 21 , Mullin e n t e r e d i n to spec i a l l ong - t e r m c on t racts wi th two o f i t s la r g e s t clien ts. T h e co mpany ' s accounting sta ff reco r d e d the t ra n sact i ons as di r e c t ed by t he Mullin chief financia l offic er . T he two transac t i ons w e r e as follows: 1. Mullin e n t e r e d into a t h r ee - y e ar cont ra c t wi th Toronto Bank t o provid e digital design s e rvic e s. The serv i ces wou l d be r end e red o n an a s - nee d e d basis ov e r t h e t h ree y e a r s. T he contract stated that Toronto Bank would pay $3 m i lli on to Mullin du r ing 20 21 , $2 m i l li on dur i ng 20 22 , and $ 1. 6 mi l li on d u r in g 2023. Toronto Bank p a i d for th e firs t year's serv i ce as a gr e ed . Mullin r eco r d e d t he payment as rev e nue for 20 21 . Th e cost o f s e rvic e s r e n dered by Mullin to Toronto Bank is not s e parat e ly t rack e d , but is part of t he regu l ar se r vice provided by Mullin to ma n y cl i en ts . 2. Mullin and Scarborough Bank s ig n e d a n ag r ee ment on October 15, 2021. A s one pa rt of the a greem e n t , Mullin des i gned a n d bu i l t a special p ur p os e pi ece o f digital solution fo r Scarborough Bank . Mullin did no t so li cit b i ds from oth e r providers du e t o t h e c l ose wo r king re l at i onship that has b ee n e stab l ish e d b e tw ee n Scarborough Bank and Mullin ov er t h e y e ars , ev e n thoug h sim i l ar solution m i gh t hav e been ob t ain e d for ab o ut 20 % le ss fr om another provider in India. Th e ag r ee me nt provid e d that Scarborough Bank would pay $5.6 m i ll i on for the solution. Th e solution was d el i ve re d t o Scarborough Bank o n D e cemb e r 23, 2021 . Scarborough Bank pa i d 40 % o f t he pric e on D ecemb e r 31, wi th a prom i s e to p ay the r e ma in ing 60 % wi t hin the firs t 90 days o f 2022. T h e solution costs Mullin $3 .4 mi llio n to build . T h e agr ee m en t provid e d that Scarborough Bank co u l d n ot s ell o r otherwise transfer the solution t o any ot h e r u s e r. I n add i tion to t he e q ui pm ent sa le , th e ag r e e m e n t st ip u lated th a t Scarborough Bank wou l d pay $1.5 million p e r yea r fo r t h e n ex t four y e a rs as a s e rvic e co n t ra ct with the firs t paym e nt d ue wi th in 120 days o f delivery. T he price is a bout 25 % le ss t han Mullin would normally charge a c li ent for that t yp e of s e rvic e . Mullin r ec ord e d re ven u e of $5.6 mi lli on for th e solution , a nd incl u d e d $3.4 mill i on i n c ost of serv i ces. T h e company a l so r e co r ded th e fir st year ' s s e rvice rev e nu e by c re di t ing $1.5 m i ll ion to r e venu e a nd de b i tin g accounts r e c e ivabl e - l ong - ter m . T h i s r evenue was match e d by charging $1.0 mi ll i on to cost of serv i ce s ( fo r t h e e s ti mated cost of p ro viding t he s e rvic e ) and credit in g an equal amount to est i m a t ed s e rvic e l i abili t y.

MGAC01 – Case Assignment 1 2021 Fall Due Date : October 17, 2021 (Sunday) It now i s J anuary 2022. Y ou ar e working for YSL Accounting firm as the audit manager. You are preparing a memo to the senior management of Mullin regarding your audit of Mullin 2021 financial results. You understand the 2021 annual management bonus is based on 5% of reported net income at the end of the year. In reviewing the financial results, you have also come across the following accounting issues: 1. Mullin decided to change the useful life of one of its computer purchased 3 years ago from 5 years to 7 years. Management stated that the computer was still running well. 2. Mullin decided to reduce the allowance for doubtful accounts (AFDA) from 8% of credit sales to 5%. Management stated that it believes the new estimate more reliably represents its percentage of uncollectible accounts. 3. During 2021, Mullin lost a decision in the Federal Court of Appeal in a lawsuit brought by one of its competitors Technology Inc, for patent infringement. In an unusual award, the court ordered Mullin to pay $ 1 million for shares of Technology Inc., a private company, which had been on some financial difficulty. Mullin has decided not to appeal the decision to the Supreme Court, and Mullin bought the shares in Technology Inc. before year end. Required: P r e par e t h e m e morand u m for the senior management of Mullin .

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