Question

GAAP Air Ltd. (GAAP Air) is an airline that was started five years ago to take advantage of the popular brand name associated with The GAAP clothing chain. GAAP Air was incorporated as a separate entity in 2015 and went public two years ago in 2018. GAAP air has struggled financially over the past few years due to depressed demand and intense competition in the airline industry. In fact, several of GAAP Air’s competitors have been forced into bankruptcy over the past few years. It is now February 2020 and industry experts are projecting a turnaround in the airline industry by 2021. Unfortunately, negative operating cash flows over the past few years have eaten up GAAP Air’s cash and available credit. GAAP air has approached a major bank for a loan to allow it to continue operating for another year, until the industry conditions improve. The bank is waiting for the 2019 audited financial statements to make a final decision on whether or not to lend the funds. You are a Senior Accountant at GAAP Air. Your boss, the Chief Financial Officer (CFO), has given you the following summary of new transactions undertaken by the company during the year. He would like you to provide a report discussing how GAAP Air should account for each of the transactions. He would like you to discuss alternative policies, where applicable, and give your opinion on which policy the company should select. The CFO would like you consider all of the financial statement users and their objectives, as well as any constraints on accounting policy choices in your analysis. He will use your report in his discussion with the company’s auditors. GAAP Air has a December 31st year end. .

1. In an effort to reduce employee turnover, the company has introduced a signing bonus for new employees. The company pays new employees a signing bonus of 5% of annual salary. The employee must repay the entire bonus if they do not stay with the company for at least two years. After the initial two year period, the employee is not obligated to repay any of the bonus. The CFO would like to know how this bonus should be accounted for.

2. Up until now, GAAP Air expensed all laptop computers when purchased, on the grounds that they become obsolete so fast that their value after one year is almost negligible. In the current year, GAAP Air bought $459,000 worth of new computers and tablets to be used by their staff for checking in customers. They plans to write them off over two years. The CFO would like to know how to account for this.

Answer 1

1. In order to reduce the expenditure (Employee turnover) the company has taken a bonus (5%) plan for new joined employees. The employees who availed this bonus should remain in the company for atleast two years, if any employee wish to quit the employment from the company within two years, he or she is required to pay the total amount of bonus received. If the employees worked for two years then they are not obligated to pay the bonus. The company wish to retain their employees in the company since the company spent lot of amount for train their employees at the time of their joining. In this situation the company should deffer the amount of bonus paid as capital expenditure at the time of incurrance of expenditure and then should written off for the next two years on straight line basis.

2.In the past years the GAAP Air purchased the laptops for their employees to check in with customers and expensed in the profit and loss account at the time of their purchase on the grounds that the laptops obsolete too quickly after one year. Now the company purchased $4,59,000 worth of laptops and wish to written off for next two years. Hence the accounting treatment for this transaction is to capitalise the Assets (Laptops cost - $459,000) and depreciate for the next two years on straight line basis and charge to profit and loss account of the respective year.