MILK-VITA DAIRY FIRM LTD Milk-Vita Dairy Firm Ltd. (Milk-Vita) is a medium-sized dairy operating in Atlantic Canada. The company’s founder, Frank Morgan, owns 60 percent of the shares. Four private individuals, who have very little involvement in operating decisions, each own 10 percent. Milk-Vita produces milk, yogurt, ice cream, etc. that it sells through grocery stores and chains throughout the Maritimes. Over the last ten years, Milk-Vita has been facing financial crisis. Employers have many reasons why they might need to reduce employees pay. The most common reason of salary reduction is when an organization that is experiencing economic challenges may ask employees to take a salary reduction. An economic downturn has affected the company’s sales, profitability, or its ability to succeed as a business. The company needs to save money but the employer has decided that he cannot operate without the current number of employees. Thus, an employee layoff, employee furloughs, or any solution that will affect his ability to serve customers and create the product are not viable choices for the business. In a salary reduction situation, employees are generally not happy with the pay cut. But, depending on the economic circumstances, they may appreciate keeping their jobs. Over the years, labour and management have had an acrimonious relationship. Over the past ten years, the union representing Milk-Vita’s employees have made significant wage concessions to avoid job losses. In the last contract negotiations, Milk-Vita and the union agreed that the union would have access to the company’s financial statements. The upcoming negotiation will be the first time the union will receive the financial statements. You have been hired by the union representing Milk-Vita’s employees to prepare a report on how to account for a number of controversial issues that arose on the union’s review of Milk-Vita’s December 31, 2017 financial statements and its preliminary discussions with Milk-Vita’s management. The union will use your report in its assessment of Milk-Vita’s financial position and performance, and its ability to pay higher wages and benefits to employees. The union leader has asked for your report to fully explain your recommendations, discuss arguments that Milk-Vita’s management might use to counter your recommendations, and identify and discuss alternative treatments that Milk-Vita might present for the outstanding issues:
1. In November 2017, a large number of people became ill, allegedly from eating some of Milk-Vita’s products. Milk-Vita vigorously denies the allegation but preliminary evidence from government investigators is pointing to Milk-Vita. A lawsuit has already been launched against the company seeking $500,000 in damages. In addition, MilkVita has conducted an advertising campaign attesting to the equality of its products and it has thoroughly cleaned the dairy in question. The advertising campaign cost $30,000 and the cleanup cost $17,500. These amounts were expensed as incurred. The company has accrued $250,000 for the lawsuit, just in case it loses.
2. In November 2015, the company signed an agreement a well-known professional athlete to endorse the Milk-Vita product line. In September 2017, the athlete was found to be a user of performance-enhancing drugs and has been suspended from his sport for at least two years. Milk-Vita has decided not to use the athlete’s endorsement anymore, although the company’s lawyer advises that the contract doesn’t provide any way to avoid paying the agreed $12,000 per month until December 31, 2019. Milk-Vita expensed the full amount of the contract owing, $288,000, in 2017.
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3. On December 31, 2017, Milk-Vita shipped a large order to a customer. Normally, MilkVita recognizes revenue on delivery to the customer. The goods shipped weren’t included in the year-end inventory count. Milk-Vita uses a periodic inventory control system. The goods were delivered on January 2, 2018.
4. Milk-Vita increased estimates of certain items including returns, inventory obsolescence, and volume discounts. Management says that these revised estimates reflect current business conditions.
5. Early in 2017, Frank loaned Milk-Vita $250,000 to provide the cash to purchase needed capital assets. The loan is to be paid back in 2020. Milk-Vita expensed $40,000 in interest on the loan in 2017.
6. In January 2018, a large customer suffered a catastrophic fire that may put the customer out of business. Milk-Vita doesn’t expect to collect any of the $65,000 it’s owed by the customer and accrued an additional expense for the amount in 2017.
Required: Provide the report to the head of the union.