Tap ‘n Pay Inc. (TNP) is a mid-sized company based in Halifax that has developed a new technology that allows for a faster and more secure debit or credit card tap payment. Tap payments can generally be done for transactions below $50 whereby a cardholder simply taps their card on the card reader to complete a transaction. TNP has also developed tap and pay technology for mobile devices. TNP generates revenue by licensing its technology to major fi nancial institutions.

TNP had an initial public offering in 2016, but financial performance was not overwhelmingly strong, resulting in net income of $75,000. The company undertook a major expansion in 2017 in order to expand operations and further invest in research and development. Various financial instruments were issued at the beginning of fiscal 2017 in order to finance the expansion. Financial performance improved, with preliminary net income reaching $250,000 in 2017.

TNP’s accounting department is beginning to prepare for the year-end audit. You decided to accept a position in TNP’s accounting department. As you are a newly qualified Chartered Professional Accountant, the controller has asked you to help develop appropriate accounting treatments for various complex fi nancial instruments. The controller provides some information on your fi rst assignment:

“We are very excited that you have decided to join our accounting department. We know that your strong technical accounting background will help us to properly account for the large number of newly issued financial instruments. The bank will certainly be looking at our financial statements in order to assess our debt to equity ratio. Our covenant requires us to maintain a ratio of no greater than 1.5:1.

While the bank will be focusing on the debt to equity ratio, investors are expecting strong performance. Specifically, investors and analysts will be expecting that our EPS meets or exceeds the consensus estimate of $0.80 per share (diluted). I’m sure that our share price will experience a sharp decline if we miss expectations.

At this point, I would like you to prepare a short memo that provides recommendations on the appropriate accounting treatment for all newly issued financial instruments. Note that the preliminary financial statements do not reflect journal entries for interest or dividends on any of these fi nancial instruments. I would also like you to prepare a preliminary estimate of debt to equity ratio based on your recommendations, along with a calculation of the basic and diluted EPS. Assume that our marginal tax rate is 25%, but please disregard any issues with deferred taxes at this stage. We can deal with that later.

Here are the preliminary estimates for debt and equity (Exhibit I) and here is some background information on the financial instruments (Exhibit II). Once your report is complete, we can sit down together to review your fi ndings.”

The controller hands you the files, and you return to your office to begin working on the report.

Required Prepare the report for the controller.