Growcorp Ltd.

Theory Case

Growcorp. Ltd., a corporate farming processing venture was established on January 1, 2004. During its first crop year, March to October 2004 the company raised crops under contract for a large retail food chain and froze and packaged those crops under the retail firm’s private brand name. The contract called for the release of the inventory from Growcorp Ltd. To the retailer as requested by the latter during 2005. The entire crop was warehoused by Growcrop Ltd. Upon packaging during September and October and it was expected that the first shipments would be made during January of 2005.

On January 10, 2005 the accounts of Growcorp Ltd. For 2004 were being finalized and a debate was taking place between the treasurer and controller of the company as to how to account for the crop revenue and related costs for the 2004 crop year. The controller was arguing for recognition of the revenue in the 2004 fiscal year while the treasurer felt that it should be included in the 2005 fiscal year.

Just as the argument was reaching a crescendo a warehouse person burst into the room where it was taking place and announced that the warehouse and its entire contents had been destroyed.

The controller looked at the treasurer slumped into a chair and said, “Thank goodness it was insured,” and then, after a pause, added “I guess my arguments just went up in smoke. It looks like you were right – a sale’s not certain ‘til it happens. We sure can’t call it revenue now.”

Required:

As the company’s auditor, what policy choice would you recommend. Present argument(s) to support your position.

Issues to consider:

i) Identify the generally accepted accounting principles(s) involved in the positions being argued before the fire.

The first accounting principle involved in the positions being argued is the Revenue Recognition Principle because it states that revenue is recognized when merchandise, goods or services or other assets...