Constance Inc. (CI) is a small private company located in Miramichi, New Brunswick. CI was incorporated in late 20X0 and has 10 common shareholders, consisting of two founders and eight of the founders friends and relatives. At the time of CIs incorporation, each shareholder was issued 200,000 common shares. In 20X1, CI completed development of technology that has the potential to revolutionize online clothing shopping. The technology, patented in 20X1 as Check Me Out, was sold to one major online clothing retailer in 20X1. During fiscal 20X2, an additional seven on-line clothing retailers purchased the technology. However, now, in early 20X3, cash is tight at CI. Current investors do not have the personal resources to invest further, yet CI desperately needs more cash to market and sell Check Me Out to clothing retailers. Bank loans are not an option for financing because of the perceived risk of CI. CIs founders believe that a takeover by a large technology company or on-line retailer is the best outcome for all. Check Me Out enables a shopper to upload personal photographs to a clothing retailers website, once the retailer is a client of Check Me Out. These photographs are translated into a 3-D image of the shopper. The shoppers can then virtually try on the retailers clothing and view the resulting images from almost 100 different angles. The technology has received positive feedback, and CIs owners are confident that CI will be a success. Large technology firms have started to show interest in CI as a takeover target. Shareholders are hoping that something firms up in this regard in the next 6 to 12 months. The founders of CI are not knowledgeable in the area of financial accounting. They realize the importance of understandable financial statements and want to make sure all applicable accounting standards are followed. For this reason, they engage the firm of Martin and Leaves Public Accountants to advise on accounting transactions in the 20X3 fiscal year.

You are a co-op student working at Martin and Leaves, with a strong handle on intermediate accounting topics. For this reason, you have been asked to evaluate several issues raised by CI and prepare a memo detailing your analysis, additional information needed, and your recommendations. CI prepares its financial statements in accordance with IFRS. You know that potential purchasers of CI will be very interested in reported EBITDA (earnings before interest, tax, depreciation, and amortization).

• Issue 1: In January 20X3, CIs founders attended several trade shows to promote Check Me Out. The cost to attend these trade shows was quite high. Since CI did not have the cash to pay for these trips, a CI shareholder cashed in several hundred thousand loyalty points earned through a credit card to cover the flights and hotels. In exchange, CI issued 10,000 common shares to the shareholder. CI is unsure as to how to record this transaction. The shares issued might be worth $25,000, based on informal discussions with a technology company that has expressed interest in acquiring CI.
  
  
• Issue 2: CI is currently engaged in a legal case over the patent for Check Me Out. Mark Ramsey, the ex-boyfriend of one of CIs founders, has filed suit against CI. Ramsey claims that Check Me Out was his idea. He is suing CI for $2,500,000. CI claims that the suit is preposterous and completely impossible to prove. Nothing has been recorded in the financial statements with respect to this lawsuit. Legal advice has yet to be sought.
  
  
• Issue 3: On 1 March 20X3, CI declared a 10% stock dividend. The purpose of this was to appease the shareholders while they wait for a return on their investments. The stock dividend has yet to be issued.
  
  
• Issue 4: In an effort to further market Check Me Out and create an additional revenue stream, CI developed an app for mobile phones during the first quarter of 20X3. This app is called Check Me Out Mobile. The most unique feature of this app is that it allows shoppers to virtually try on clothing while in a physical storefront. The app can display virtual images of the shopper wearing items on display in the store. The app can combine items from the store, other stores where the shopper has uploaded data, and the shoppers own closet. The app will be promoted with the slogan, Its like having a stylist living in your phone, because of the variety of outfit alternatives that can be displayed. A retailer does not have to be a Check Me Out client for shoppers to use the app in their store. However, functionality is greatly enhanced when the retailer is a client. For example, a retailer that is Check Me Out enabled will have codes displayed on clothing tags that can be scanned and quickly tried on by customers. If a retailer is not Check Me Out enabled, a shopper will have to take a picture of the clothing item to enter the item in their virtual wardrobe. Costs of $150,000 were incurred to create the app. The breakdown of these costs, which are reported under intangible assets on CIs balance sheet, is as follows:

Market research $25,000

Design of prototype $35,000

Testing and Refinement $40,000

Advertising $50,000

The app will go on sale on 1 April 20X3. Based on market research conducted, and the positive word-of-mouth that has been generated through various social media marketing campaigns, it is expected that initial sales of this product will be strong. CI forecasts sales of approximately $100,000 during fiscal 20X3. Beyond that, it is difficult to speculate what will happen. CI suspects that the long-term success of the app is dependent on whether clothing retailers continue to adopt Check Me Out

Instructions

Please prepare case report outlining all accounting/financial reporting issues