The Green Monster
Joe Dough Inc., a public company, is a manufacturer of lawn andgarden and recreation
machinery. The Company manufactures both large heavy-dutycommercial equipment
and smaller equipment for residential use. The Company has a largeproduct line that
includes tractors, lawn mowers, snow blowers, snowmobiles,all-terrain vehicles,
hedgers, tillers, etc. The primary purchasers of their commercialproducts are golf
courses and ski resorts.
The Company sells 90- 95% of their products through authorizeddealers. The majority
of the dealers sell Joe Dough Inc.âs products exclusively and theCompany feels that the
dealer network gives them a competitive advantage. The dealers areindependently
owned. Joe Dough Inc. recognizes revenue when deliveries are madeto the dealer. The
dealers pay for the products under normal business terms. There arevarious marketing
efforts that are performed in conjunction with the dealers. Themajority of these
marketing efforts are through sales incentives or rebates. JoeDough Inc. reimburses their
dealers for all rebates and sales incentives. Joe Dough Inc.currently only records an
estimated rebate liability for product that has already been soldto their dealer network.
This policy has been disclosed in the financial statements and theSEC has approved this
treatment.
One of the Companyâs most successful products over the past severalyears has been the
LT-22, or âthe Green Monster.â The Green Monster is a tractor/lawnmower that can be equipped with a mulcher, snow blower, tiller andvarious other accessories. The Green Monster was sold from 2003 to2013 and was considered the industry leader. Over the years, therehave been several accidents involving the Green Monster. Theaccidents have recently caught the attention of the media and therehave been several stories reporting a potential design flaw.The
Company claims that the equipment is as safe or safer than theircompetitors, and they
feel that they have the industry statistics to support their claim.However, a large class
action lawsuit has recently been filed against Joe Dough Inc. Thelawsuit claims that
there is a design flaw that makes the Green Monsterâs mower unsafeto operate and that Joe Dough Inc. needs to either recall all GreenMonsters and fix the flaw or provide compensation to theplaintiffs.
Joe Dough Inc. is very confident that they will win their case;however they do not like
the negative publicity associated with the lawsuit and are afraidthat the case could
seriously affect their customer loyalty. Therefore, Joe Dough Inc.has proposed a type of
settlement or goodwill gesture that will allow Joe Dough Inc. tocontinue to maintain
customer loyalty without having the cash outlay of totalrecall.
Joe Dough Inc. is aware of a recent business trend in whichcompanies have been settling
lawsuits with coupons or certificates good for discounts on futurepurchases. This
strategy is attractive because the company could continue to assertthat there are no past
or present safety problems associated with the product. Therefore,this would simply be a
strategy to maintain customer loyalty in light of their recent badpress.
Under the proposed settlement, any current owner of a Green Monsterwill receive a certificate for $200 off the purchase of any JoeDough Inc. product within the next three years. The
certificate is similar to the current rebates and sales incentivesoffered by Joe Dough Inc.
Joe Dough Inc. would also agree to pay the legal costs for allparties associated with the
settlement. The legal costs are expected to be significant.
Management also believes that the Companyâs competitors would honorthese certificates
at their dealerships. The Company believes that the competitionwill match any of their
rebates or sales incentive programs.
Joe Dough Inc. would like to account for the certificates as asales incentive or rebate and
record as a reduction of gross profit as the tractors are sold andthe certificates are
redeemed. Their justification for this accounting is that they havenot admitted fault; the
program is similar to all of their other sales incentives and theyexpect the competition to
match the program. Joe Dough Inc. has been expensing their legalcosts as they are
incurred and has accrued the costs of the plaintiffâs legalexpenses as they are reasonably
estimable and with the proposed settlement it is probable that JoeDough Inc. will have to
bear these costs.
Required:
Is it appropriate to account for the certificates as a salesincentive and match the
cost associated with the certificates with the future revenuestream or should the cost of the incentive be expensed immediatelyas a legal settlement and recognized as a liability? You must argueboth alternatives VIGOROUSLY. Make sure to base your arguments onboth the accounting literature (FASB codification), the case factsand relevant business considerations. After vigorously arguing bothalternatives, state which alternative you believe to be preferableand explain why. Also, make sure that you explain how theaccounting would work. Lastly, it is safe to assume that the use ofthe certificates would not result in any of the products being soldat a loss.
The Green Monster
Joe Dough Inc., a public company, is a manufacturer of lawn andgarden and recreation
machinery. The Company manufactures both large heavy-dutycommercial equipment
and smaller equipment for residential use. The Company has a largeproduct line that
includes tractors, lawn mowers, snow blowers, snowmobiles,all-terrain vehicles,
hedgers, tillers, etc. The primary purchasers of their commercialproducts are golf
courses and ski resorts.
The Company sells 90- 95% of their products through authorizeddealers. The majority
of the dealers sell Joe Dough Inc.âs products exclusively and theCompany feels that the
dealer network gives them a competitive advantage. The dealers areindependently
owned. Joe Dough Inc. recognizes revenue when deliveries are madeto the dealer. The
dealers pay for the products under normal business terms. There arevarious marketing
efforts that are performed in conjunction with the dealers. Themajority of these
marketing efforts are through sales incentives or rebates. JoeDough Inc. reimburses their
dealers for all rebates and sales incentives. Joe Dough Inc.currently only records an
estimated rebate liability for product that has already been soldto their dealer network.
This policy has been disclosed in the financial statements and theSEC has approved this
treatment.
One of the Companyâs most successful products over the past severalyears has been the
LT-22, or âthe Green Monster.â The Green Monster is a tractor/lawnmower that can be equipped with a mulcher, snow blower, tiller andvarious other accessories. The Green Monster was sold from 2003 to2013 and was considered the industry leader. Over the years, therehave been several accidents involving the Green Monster. Theaccidents have recently caught the attention of the media and therehave been several stories reporting a potential design flaw.The
Company claims that the equipment is as safe or safer than theircompetitors, and they
feel that they have the industry statistics to support their claim.However, a large class
action lawsuit has recently been filed against Joe Dough Inc. Thelawsuit claims that
there is a design flaw that makes the Green Monsterâs mower unsafeto operate and that Joe Dough Inc. needs to either recall all GreenMonsters and fix the flaw or provide compensation to theplaintiffs.
Joe Dough Inc. is very confident that they will win their case;however they do not like
the negative publicity associated with the lawsuit and are afraidthat the case could
seriously affect their customer loyalty. Therefore, Joe Dough Inc.has proposed a type of
settlement or goodwill gesture that will allow Joe Dough Inc. tocontinue to maintain
customer loyalty without having the cash outlay of totalrecall.
Joe Dough Inc. is aware of a recent business trend in whichcompanies have been settling
lawsuits with coupons or certificates good for discounts on futurepurchases. This
strategy is attractive because the company could continue to assertthat there are no past
or present safety problems associated with the product. Therefore,this would simply be a
strategy to maintain customer loyalty in light of their recent badpress.
Under the proposed settlement, any current owner of a Green Monsterwill receive a certificate for $200 off the purchase of any JoeDough Inc. product within the next three years. The
certificate is similar to the current rebates and sales incentivesoffered by Joe Dough Inc.
Joe Dough Inc. would also agree to pay the legal costs for allparties associated with the
settlement. The legal costs are expected to be significant.
Management also believes that the Companyâs competitors would honorthese certificates
at their dealerships. The Company believes that the competitionwill match any of their
rebates or sales incentive programs.
Joe Dough Inc. would like to account for the certificates as asales incentive or rebate and
record as a reduction of gross profit as the tractors are sold andthe certificates are
redeemed. Their justification for this accounting is that they havenot admitted fault; the
program is similar to all of their other sales incentives and theyexpect the competition to
match the program. Joe Dough Inc. has been expensing their legalcosts as they are
incurred and has accrued the costs of the plaintiffâs legalexpenses as they are reasonably
estimable and with the proposed settlement it is probable that JoeDough Inc. will have to
bear these costs.
Required:
Is it appropriate to account for the certificates as a salesincentive and match the
cost associated with the certificates with the future revenuestream or should the cost of the incentive be expensed immediatelyas a legal settlement and recognized as a liability? You must argueboth alternatives VIGOROUSLY. Make sure to base your arguments onboth the accounting literature (FASB codification), the case factsand relevant business considerations. After vigorously arguing bothalternatives, state which alternative you believe to be preferableand explain why. Also, make sure that you explain how theaccounting would work. Lastly, it is safe to assume that the use ofthe certificates would not result in any of the products being soldat a loss.
