Rayners College Computational and Data Storage Services Company Questions I need help with the case study. My prof is very serious about plagiarism and using outside sources. So please dont use any sources if possible. All the information about the case is attached below. Respond to the following prompts. Please type using a word processing program and bring a printed
copy to class. Write as much or as little as you feel necessary to answer each question to the best of your
ability. You may use all available resources to complete this case – e.g., lecture slides, notes, your book,
and the Accounting Standards Codification. Collaboration with others in your group is vital. How you
work together is up to you – however, I encourage everyone in the group to take at least some part for
both questions. Please turn in only one finished assignment for each group. Groups will be randomly
assigned with three or four participants each and can be found on Canvas. Consider each prompt
For grading, I will focus primarily on the analysis and communication that you provide. There is not
necessarily a “right answer” that I will be looking for and I will not grade based on that your opinion, as
long as it is well-justified and communicated. Instead, I want to be able to follow your own accounting
and ethical decision-making clearly and to be able to not just understand what your decision(s) should be,
but also why you feel that they are best, considering the impact on ALL the entity’s stakeholders,
Question 1 (50 points):
After graduation, you began work at a moderately large, but rapidly growing, tech company in the
bay area. The company’s primary sales revenue is generated by providing computational and data storage
services to a variety of companies in the area. In particular, it often bundles the two together by selling
rights to both access data storage at off-site ‘data warehouses’ and proprietary software which allows
rapid data analysis. The new revenue recognition standard, ASC 606, has caused some changes in how
the company booked its revenue. Previously, when it sold the two bundled together, it waited until all
services were rendered to book any revenue. This caused revenue to occur in big, sudden ‘chunks’ at
arbitrary periods of time when contracts were completed. Now, however, the revenue recognition team
must separate the single sale in order to recognize revenue for each service over time. The new lease
standard, ASC 842, however, has particularly caused increased confusion, since the right to use the data
storage may be considered a lease. Your team has been tasked to determine what the appropriate
accounting treatment for a new contract that was recently signed in order to finalize adjustments to the
company’s records for FYE 2019.
The company has recently contracted with another corporate entity to provide both data storage
and computation/analysis services. The contract takes effect on October 1, 2019 with payment due
quarterly at the beginning of each calendar quarter, with the payment for the first quarter due
immediately. The customer’s marginal borrowing rate is estimated to be 6%. The contract is to provide
both data storage and data computation/analysis services through December 31, 2021, with an option to
renew for one year until 2022, which the customer is expected to exercise. There are no options to
purchase the equipment and the ownership of the equipment remains with us after the contract. In
addition, there is no specific physical item being used, but instead a part of a large array of data storage
and processing equipment, of which this entity’s contract only uses a fraction. The contract specifies
payments of $7,500,000 each quarter but does not state whether it is for the data storage or data analysis.
Data storage is capped at one petabyte (approximately 1,000 terabytes) of storage. The company
sometimes sells excess storage capacity to outside parties at a rate of $2000 per terabyte per month. The
company does not sell its data analysis software without selling data storage since it is concerned about
trade secrets being compromised. In-house analysts estimate, however, that if it ever did sell a license for
its data analysis program, that it would charge at least $20,000,000 for a one-year license.
In prior years, we deferred all revenue from such contracts all at once at the end of each contractyear, since companies did not tend to use our services in a linear way over the contact period, but instead
had activity clustered around fiscal-end periods.
Discuss and examine the impact of the change in accounting on the company’s December 31, 2019
Question 2 (25 points):
You have gone to work at a growing automotive company which offers unique vehicles which, in
particular, provide a ’green’ alternative to driving through extremely low-emission and no-emission
vehicles. The vehicles use complex software in order to maximize the efficiency of the car’s engine(s)
and to provide the driver with the optimal driving experience. In order to get the best possible talent, the
company previously offered an extremely benefits package, which included equity compensation, equity
options, retirement benefits (including post-retirement benefits such as healthcare) and numerous
perquisites such as on-site meals and
When the company was private, the company simply expensed these benefits when they were
incurred, such as paying outside vendors for the meals and paying retirement benefits when actual costs
were realized. The company, however, is now considering going public and must follow U.S. Generally
Accepted Accounting Principles (GAAP). GAAP requires expensing benefits expenses when the liability
is incurred – such as when the work is done, rather than when the expenditure occurs. After doing some
preliminary calculations, the company’s CFO realizes this will result in hundreds of millions of more
dollars in expenses (because very few retirement benefits have been yet realized) and almost a billion
dollars of liabilities. They call the accounting team together and discuss solutions.
“This is unacceptable. This will put us in the red now and in every year in the future just because
of some dumb accounting rules,” the CEO, known for their rather tactless public appearances and social
media communication, says.
“We don’t really have a choice,” the CFO explains. “GAAP is GAAP.”
“Surely we’ve got a choice. For now, at least, let’s stop all employee hiring and contract out
everything we can,” the CEO says with a snap of their fingers.
“We’ve still got a massive liability from our current employees, though,” the CFO continues.
“This will scare off a lot of investors.”
“Can we ‘transition’ some of them to another team? Even better, let’s spin off manufacturing to a
separate company but keep it all in-house. We’ll then sell all but 49% of the equity to my brother’s
company. Then can we take these expenses and liabilities off?” the CEO proposes.
Meanwhile, you are just forced to take it all in and decide for yourself.
What do you think of the CEO’s plan? What do you think of the possible accounting treatment?
Think carefully about everyone impacted by the decision and who stands to benefit or suffer.
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