Case #2 (Suggested time: 60 minutes) It is January 15, 2020. You, CPA, work in the accounting department of Entertain Me Co. (EMC), a Canadian-controlled private corporation (CCPC) that operates various entertainment establishments, such as cinemas, arcades, and comedy clubs. EMC has one wholly-owned subsidiary, Get Me Out Inc. (GMO), which runs several escape rooms. At escape rooms, customers pay to enter a themed, locked room as a team. Using a series of clues, they solve challenges to find their way out within a specified time limit. As EMC prepares for its fiscal year end, it must ensure GMO's financial statements are prepared correctly in accordance with IFRS. Your boss, Sarah, has asked you to look at several of the transactions at GMO and advise on the correct accounting treatment. She has provided you with GMO's draft income statement and her notes in Appendix I. Sarah would also like to know how much federal corporate GMO can expect to pay for 2019. She would like you to calculate the 2019 federal taxes payable, taking into consideration the information from the draft income statement and the additional tax information in Appendix II. EMC expects to use $400,000 of the small business limit on its 2019 tax return, and the remainder is available for GMO's use. APPENDIX DRAFT INCOME STATEMENT AND SARAH'S NOTES Get Me Out Inc. Draft Income Statement For the year ended December 31, 2019 (in thousands of dollars) $1,652 Sales (Notes 1 and 2) Operating expenses Advertising and promotion Bank charges and interest Depreciation Licences for room plans (Note 3) Office Renovations (Note 4) Salaries and wages 277 30 90 100 90 250 590 Net income before taxes $ 225 Notes 1. In 2019 GMO decided to improve sales by offering a promotion. Customers pay $25 to play a room and then receive a coupon for 40% off of their next visit. As at December 31, 2019, 60,000 coupons had been issued, and of those, 10,000 had been redeemed EMC's experience with other entertainment-based businesses suggests that 30% of coupons get redeemed GMO recorded the initial sale at $25. When customers redeemed a coupon, the sale was reported in the income statement net of the discount. I am not sure if we handled the recording of revenue correctly with regards to the coupon and would like some guidance here. 2. During 2019, GMO facility was rented by EMC for private parties at a reduced rate, amounting to 200 people total paying $10 each instead of the regular $25. These transactions have been recorded at the $10 received, but I wonder if that is the correct amount to use as the rate was only provided because of GMO's relationship with EMC. I would also like to know what information needs to be disclosed in the financial statement notes with respect to these transactions. APPENDIX I (continued) DRAFT INCOME STATEMENT AND SARAH'S NOTES 3. GMO purchased unlimited-life licences to room themes and clues from Mystery Mania Ltd. in order to provide customers with new experiences. The arrangement permits GMO to use the plans for its own purposes but does not permit GMO to give or sell them to a third party. Exciting, challenging room plans are critical for the success of escape room businesses, and keeping the room plans secret is paramount. Before entering a room, customers sign a waiver saying they will not disclose details of the room to others after the fact, but nothing really stops them from doing so (although most keep the details to themselves as a sort of unwritten code of ethics, to keep it fun for others). The bookkeeper expensed the costs of the licences, but I would like to know if there is a way to capitalize them as an intangible asset. 4. During 2019, management decided to redesign the layout of a building owned by GMO (with a remaining useful life of 10 years) to make better use of the space. Some of the walls were rearranged to create space for a waiting area, the lighting fixtures and bathrooms were updated, and the carpeted flooring was replaced with hardwood, all at a cost of $240,000. The remaining $10,000 is related to paint, varnish, and small decorative items, such as throw pillows APPENDIX II ADDITIONAL TAX INFORMATION We encountered a delay in filing the prior year's tax return. GMO was charged a $500 late filing penalty and $670 in late payment interest. These have been included in bank charges and interest on the income statement. The $90,000 of depreciation is related to building, furniture, and equipment. Capital additions in 2019 included $30,000 for furniture and $50,000 for computer equipment (these have been included in PPE, and their depreciation is part of the $90,000 on the income statement). The opening UCC balances for GMO were as follows: Class 1 Class 8 $345,000 $ 75,000 Case #2 (Suggested time: 60 minutes) It is January 15, 2020. You, CPA, work in the accounting department of Entertain Me Co. (EMC), a Canadian-controlled private corporation (CCPC) that operates various entertainment establishments, such as cinemas, arcades, and comedy clubs. EMC has one wholly-owned subsidiary, Get Me Out Inc. (GMO), which runs several escape rooms. At escape rooms, customers pay to enter a themed, locked room as a team. Using a series of clues, they solve challenges to find their way out within a specified time limit. As EMC prepares for its fiscal year end, it must ensure GMO's financial statements are prepared correctly in accordance with IFRS. Your boss, Sarah, has asked you to look at several of the transactions at GMO and advise on the correct accounting treatment. She has provided you with GMO's draft income statement and her notes in Appendix I. Sarah would also like to know how much federal corporate GMO can expect to pay for 2019. She would like you to calculate the 2019 federal taxes payable, taking into consideration the information from the draft income statement and the additional tax information in Appendix II. EMC expects to use $400,000 of the small business limit on its 2019 tax return, and the remainder is available for GMO's use. APPENDIX DRAFT INCOME STATEMENT AND SARAH'S NOTES Get Me Out Inc. Draft Income Statement For the year ended December 31, 2019 (in thousands of dollars) $1,652 Sales (Notes 1 and 2) Operating expenses Advertising and promotion Bank charges and interest Depreciation Licences for room plans (Note 3) Office Renovations (Note 4) Salaries and wages 277 30 90 100 90 250 590 Net income before taxes $ 225 Notes 1. In 2019 GMO decided to improve sales by offering a promotion. Customers pay $25 to play a room and then receive a coupon for 40% off of their next visit. As at December 31, 2019, 60,000 coupons had been issued, and of those, 10,000 had been redeemed EMC's experience with other entertainment-based businesses suggests that 30% of coupons get redeemed GMO recorded the initial sale at $25. When customers redeemed a coupon, the sale was reported in the income statement net of the discount. I am not sure if we handled the recording of revenue correctly with regards to the coupon and would like some guidance here. 2. During 2019, GMO facility was rented by EMC for private parties at a reduced rate, amounting to 200 people total paying $10 each instead of the regular $25. These transactions have been recorded at the $10 received, but I wonder if that is the correct amount to use as the rate was only provided because of GMO's relationship with EMC. I would also like to know what information needs to be disclosed in the financial statement notes with respect to these transactions. APPENDIX I (continued) DRAFT INCOME STATEMENT AND SARAH'S NOTES 3. GMO purchased unlimited-life licences to room themes and clues from Mystery Mania Ltd. in order to provide customers with new experiences. The arrangement permits GMO to use the plans for its own purposes but does not permit GMO to give or sell them to a third party. Exciting, challenging room plans are critical for the success of escape room businesses, and keeping the room plans secret is paramount. Before entering a room, customers sign a waiver saying they will not disclose details of the room to others after the fact, but nothing really stops them from doing so (although most keep the details to themselves as a sort of unwritten code of ethics, to keep it fun for others). The bookkeeper expensed the costs of the licences, but I would like to know if there is a way to capitalize them as an intangible asset. 4. During 2019, management decided to redesign the layout of a building owned by GMO (with a remaining useful life of 10 years) to make better use of the space. Some of the walls were rearranged to create space for a waiting area, the lighting fixtures and bathrooms were updated, and the carpeted flooring was replaced with hardwood, all at a cost of $240,000. The remaining $10,000 is related to paint, varnish, and small decorative items, such as throw pillows APPENDIX II ADDITIONAL TAX INFORMATION We encountered a delay in filing the prior year's tax return. GMO was charged a $500 late filing penalty and $670 in late payment interest. These have been included in bank charges and interest on the income statement. The $90,000 of depreciation is related to building, furniture, and equipment. Capital additions in 2019 included $30,000 for furniture and $50,000 for computer equipment (these have been included in PPE, and their depreciation is part of the $90,000 on the income statement). The opening UCC balances for GMO were as follows: Class 1 Class 8 $345,000 $ 75,000