Effective Writing 10th Edition by Claire May,Gordon May

Exercise 2

Harmon Industries manufactures and sells industrial machinery around the world. The company is heavily dependent on contracts with transatlantic and transpacific shipping companies to deliver its products. Because fuel prices are unpredictable, several of the shipping companies Harmon uses have included a clause in their contracts allowing them to impose a fuel supplement if the price of West Texas Intermediate fuel exceeds a stipulated price per barrel. Although the supplement has never been imposed, the price of fuel has been increasing fast, and Harmon's controller, Trent Johnson, is concerned about how he will account for the supplement if it is imposed. Typically, contracts state that the supplement may be imposed on June 30 each year to cover the shipping company's fuel purchases during the preceding 12 months. The amount of the surcharge levied on any one shipper, such as Harmon, would be based on a formula that takes into account the number of shipments and tonnage shipped by that shipper during the period. Based on Harmon's projections, such a levy, if ever made, could result in several million dollars of additional expense. Harmon has a fiscal year end of December 31. Mr. Johnson has asked you, a member of his accounting staff, to research the problem of accounting for any fuel supplement that might be imposed. He has asked you to look into these questions:
• Should the supplement be treated as an expense of the period in which it is imposed, or should it be apportioned between the current and preceding periods in some manner?
• How should the supplement be reported (classified) in the financial statements?
• What type of risk disclosure (if any) should be included in the financial statements?
Mr. Johnson has indicated that you should look into all accounting and reporting aspects of the situation and not just his list of questions. If he has left anything significant out of his list, you should cover that as well.
Write a report to Mr. Johnson responding to his concerns.