Introduction of Dollar General Stores
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Dollar General Stores, Inc was a financially successful retailer founded by the Turners family in 1955. Their business model is to sell merchandise with a retail sales price of one dollar or less. In 1999, Cal Turner decided that the company need to update its information system to keep up with competition. An important part of the plan was to buy a brand new cash-register series produced by IBM. This new system would help Dollar Generals analyze the sales trend and thus, improve business efficiency.
Although the new cash registers are very important to improve their business, installation of those means that the company has to dispose thousands of old sales registers. Since these old machines have no salvage value, the company is forced to record a $10 million loss-book value loss of the old registers. If this is recorded as an expense according to GAAP, the companys net income for 2000 would be decreased by 6 % to 7%.
While discussing the “accounting problems” caused by the roll-out of old machines, IBM sales representative Kevin Collins suggested that IBM buy all the old cash registers for $10 million( claiming that it was the remaining book value of those machines) and then lease the new machines for $20 million so that Dollar generals wont have to record the $10 million loss. Dollar General would, after that, pay back the $10 million owed to IBM in several installments
The deal, analyzed by Collins would benefit both parties. Dollar general would avoid the “book loss issue” while IBM would record bigger sales revenue. In addition, the successful transaction would increase Collins 200 year-end bonus by 50%. Apparently, both sides found this deal very difficult to resist. They decided to go for it.
The case was disposed in 2007 when SEC charged Dollar General with engaging in ” a series of fraudulent or improper accounting practices”.
SEC also reported that IBM shared responsibility for aiding the deal.
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