Case 12-02 Essay

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Case 12-02 To Recognize or Not to Recognize, That Is the Question Shakespeare Inc. (“Shakespeare” or the “Company”) is a privately held book printing and publishing company with a December 31 year-end. The summary balance sheet as of December 31, 2010, included: Current assets Noncurrent assets Total assets Current liabilities Noncurrent liabilities Total liabilities Total shareholder equity $ 6,500,000 28,250,000 $34,750,000 $ 4,500,000 13,750,000 $18,250,000 $16,500,000

The summary results of operations for the year ended December 31, 2010, included revenue of $10.7 million and net income of $1.2 million. Shakespeare is planning to issue its financial statements on March 20, 2011. On March 18, 2011, Shakespeare’s management will
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Historically, all claims are received by Shakespeare within two months of the medical services being provided to its employees. Using this process, management estimated an IBNR liability of $1.25 million as of December 31, 2010. As of management’s review on March 18, 2011, Shakespeare had

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Case 12: To Recognize or Not to Recognize, That Is the Question

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received claims totaling $0.75 million for medical care costs incurred before December 31, 2010. Line of Credit Modification As of December 31, 2010, Shakespeare had a line of credit with a bank of $8 million (with a $10 million maximum amount available) due in approximately three years from the balance sheet date. Interest accrues on amounts drawn under the line at the London Interbank Offered Rate (LIBOR) (subject to a 3.5 percent floor) plus 7.5 percent per year. Shakespeare is also required to pay a commitment fee equal to 2 percent per year on the portion of the line of credit that was not drawn upon. On March 1, 2011, the Company completed its modification of the terms of the line of credit with the bank to finance the acquisition of a competitor printing and publishing company (see further facts of acquisition below). The key modified terms are as follows: • • • • The maximum amount available under the line of credit was increased from $10 million to $20 million. The term was
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