Core 1 — Practice Case 2
Case (60 minutes)
Piikani Tool and Supply Corp. (PTS) is an Indigenous-owned chain of light tool rental
stores headquartered in Edmonton, Alberta. The company was incorporated in the ’90s
and has grown from a single store in Sherwood Park to over 30 stores throughout
Alberta and BC, capitalizing on the growth of the mining, oil, and gas sectors in these
provinces.
After years of slow and steady growth, opening only one new store per year, PTS
opened 10 new stores in 2023. Tom Morris, representing Prairie Sky, an Indigenous
Economic Development Corporation and the controlling shareholder of PTS, felt that
rapid expansion was necessary to make the brand visible in the fast-growing real estate
development industry. This pivot helps PTS diversify away from the volatility of the
resource sector. The expansion was financed by a 10-year term loan from PTS’s bank.
Tom noted that the bank appears to be concerned with the profitability of the company.
Harford & Harford LLP (H&H), a mid-sized professional services firm, has been PTS’s
auditor since its inception. You, CPA, are the audit senior on the PTS audit for the year
ending December 31, 2023. It is now January 15, 2024, and the engagement partner
calls you into her office to explain that the audit will begin in early February. PTS’s bank
is eager to see the audited financial statements due to a new loan granted during the
year.
“I met with Tom a few months ago and he told me about PTS’s expansion, and the new
programs adopted during the year. The controller of PTS has sent us the year-end
financial statements (Appendix I). Here are my notes from that meeting (Appendix II). I
would like a memo discussing the new financial reporting issues that have arisen since
the last year end. This will help us in our audit planning. PTS follows International
Financial Reporting Standards (IFRS), as the company has not ruled out the possibility
of going public in the future.”
“Also, please provide a memo assessing the overall financial statement level risk of
material misstatement, approach, and materiality for the 2023 financial statement audit.
We have always based materiality on income before tax and taken a combined
approach to the audit.”
Your response should be no longer than 1,800 words, excluding any Excel files.
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2023-11-07
Core 1 — Practice Case 2 Case
Appendix I
Excerpts from the financial statements
(in thousands of dollars)
Statement of financial position as at December 31
2023 2022
(draft) (audited)
Assets
Cash $ 21 $ 35
Accounts receivable 4,210 –
Inventory — Used rental tools for sale 3,526 –
Other assets 1,849 1,517
Tools for rent 10,250 8,664
Property, plant, and equipment 40,780 34,225
Total assets $ 60,636 $ 44,441
Liabilities and equity
Accounts payable $ 652 $ 3,569
Long-term debt 18,367 –
Due to shareholders 4,532 6,483
Common shares 100 100
Retained earnings 36,985 34,289
Total liabilities and equity $ 60,636 $ 44,441
Statement of earnings for the year ended December 31
2023 2022
Revenues
Rentals $ 24,298 $ 20,559
Sales 6,821 5,946
No Late Fees 4,539 –
Other 787 619
36,445 27,124
Expenses
Amortization 659 450
Cost of tools sold 7,797 4,757
Other expenses 14,734 12,737
Wages and benefits 8,340 7,465
Income taxes 2,219 206
Net income $ 2,696 $ 1,509
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Core 1 — Practice Case 2 Case
Appendix II
Notes from meeting with Tom Morris
No Late Fees
During 2023, PTS introduced a new program called No Late Fees. Under the program,
customers do not pay late fees for light tools that are not returned on time. If a tool is not
returned within 30 days, PTS considers the tool to be sold to the customer who rented it
and the customer is charged $300, which is the average cost of a new light tool. The
customer then has the right to keep the tool. The program does not apply to PTS’s
expensive specialty tools, as these items have never been an issue for late return or
payment.
The program has been “tremendously successful,” according to Tom, as it has
increased revenue from the sale of tools since many customers fail to return their
rentals within 30 days. Tom conceded that the program has upset some customers who
believed that PTS had truly eliminated all forms of late fees. Most customers who have
been charged for a light tool that they have not returned within 30 days have refused to
pay the charge and have simply returned the tool to a PTS store. Other customers have
refused to pay the charge and have yet to return the tool. The accounts receivable on
the balance sheet relates entirely to this program.
RentPoints
In January 2023, PTS introduced a customer reward program called RentPoints. For
every $20 that customers spend with PTS, they get one RentPoint added to their PTS
account. The point-of-sale system in PTS’s stores automatically tracks the points each
time a customer rents or purchases a light tool.
Customers can then redeem RentPoints for selected rewards. For example, 100
RentPoints can be redeemed for a free tool rental worth $50, or 25,000 RentPoints can
be redeemed for a trip for two to Hawaii. Although Tom believes the program has been
very popular, only 92,000 RentPoints have been redeemed to date. Tom has faith that
people will eventually redeem their points since the points do not expire.
Previously used tools
In the past, a wholesaler purchased all of PTS’s previously used tools that were being
retired from rentals. Now, due to expansion, PTS has more supply than the wholesaler
needs. As a result, PTS has started offering the remaining used tools for sale to its
customers at discounted prices. Each of these retired tools is scanned and its carrying
amount is transferred from “Tools for rent,” a property, plant, and equipment account
amortized straight-line over four years, to “Inventory — Used rental tools for sale.”
New tools have an average cost of $300. The average tool transferred to “Inventory —
Used rental tools for sale” is 1.5 years old and sells for $100.
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