QUESTION

Discount Airlines Inc. (Discount) is a privately owned airline operating from the
Toronto Island Airport. Discount has been growing rapidly since its incorporation in
2005. Currently it operates charter flights between major cities across Canada. The
company was founded by Mr. Wright, a past executive at Air Canada. The shares are
currently 100% owned by Mr. Wright and his immediate family.

Given the rapid growth, Mr. Wright has decided to hire an experienced airline executive,
Mr. Jet Set, to become the new Chief Executive Officer (CEO) of Discount. Though, Mr.
Wright will remain the Chairman of the Board, he has given full operational control of the
company to Mr. Set. Mr. Wright offered Mr. Set a generous salary, plus a bonus based
on 10% of Discounts net income.

Recently the federal government introduced a new program to assist small airlines in
competing in the market place. This new program offers low-interest loans and fuel
subsidies to airlines that meet certain conditions. Under the program, qualifying
companies that have gross revenues of less than a specified amount, can apply for the
interest-free loans and subsidies. To verify the revenues, airlines must submit their year-
end financial statements. This would be a great source of financing, as Discounts
currently borrowing rate is 12%

It is now April 2011, and the financial statements for the December 31, 2010 fiscal year
have not been finalized. Given the recent events, Mr. Wright has decided to conduct a
review of the companys accounting policies and has hired you to advise him on
appropriate accounting policies. You learn the following:

1. Discounts flight employees are represented by two unions the United Pilots
Federation and the Union of Flight Attendants. Under the current union contract,
annual financial statements must be submitted to the union. Mr. Wright has tried but
failed to renegotiate the unions contracts to reduce salaries and benefits.

2. With Mr. Sets efforts, Discount signed an agreement, in 2010, with the Toronto
Raptors to have their logo painted on the exterior of all its airplanes. The logo will
remain on the aircraft for three years. As per the agreement, the Toronto Raptors
paid Discount $5 million on signing and will pay $1 million each year for the duration
of the agreement. The first year of the agreement is guaranteed, but after that, either
party can elect to discontinue it.

3. To increase sales, Discount has begun offering loyalty rewards, or Discount Miles.
Customers receive a certain number of these miles for each flight they travel on,
which they can eventually use for free flights. Redemption of free flights is subject to
blackout periods during high traffic times, otherwise, there are no restrictions. This
program began only in 2010, so few customers have saved enough Discount Miles
for free flights. However, it is believed that customers will find the program attractive.
4. Also in 2010, Mr. Set purchased some aircraft maintenance equipment from a
recently bankrupt airline for $500,000. The equipment was old and required
significant repairs and maintenance, which cost $2 million. Mr. Set feels that the
equipment has been restored to a nearly new condition and will last for at least five
years before being scrapped. New equipment of similar type and use would have
cost nearly $3 million.

Required:

Prepare a report to Mr. Wright that reviews and critiques Discounts accounting policies
and provides recommendations.

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who am I: actg adviser

report to: mr wright (chairman)
need- review actg policies + advise

user:
cra- tax returns-defer taxes
mr wright/family- evaluate performance show good performance maximize net income
mr jetset- determine his bonus- net income reflects performance of mr.jetset
Government- subsidies- minimize gross revenue in order to qualify
Union- contract- our objective, minimize net income to try to negotiate lower contract

Primary user: government-

To
From
Subject

Overview-
User objectives
# users+ why
contrainst + why
(aspe ccheaper easier to follow)

issue #1 revenue recognition. ( be specific)

4