\fll.u"ictor has compiled the following nancial information related to the Rent Boxes: 1: Initial, Up-t'ront capital costs 52,250,le are required to purchase the 20 Rent Boxes. 1: The project is eXpected to generate future cash ow of$2,$00,000 per annum over a ve-year period a The project is capital intensive, and therefore has relatively little Variable costs. Direct van'ahles costs are expected to be $350,000 per annum over the ve-year period. 0 Advertising costs are expected to increase by 5% from 2020. o l|Wages and Benets costs are expected to increase by 7% from 2020. o The Rent Boxes will have a CCA rate of20%. - DSI has a cost of equity (111296. "I also met with DSl's Chief Ineration Dicer, Nick Nightingale. He provided a description of DSl's eXpansion during 2020 into the Internet-based video game rental market through a program called Games By Mail. Here are my notes from my meeting 1with Nick {Exhibit lVI. Please reviewI them and provide your recommendations for improving the system 1 will pass on your comments to our lnformation Technology {IT} partrler so that she can include them in a report she is preparing for Victor. lVictor has asked our IT partner to meet with him to discuss the information technology issues related to the Internet-based rental system." Exhibit IV Notes from Meeting with Nightingale Nick Nightingale is the Chief Information Ofcer for D31 and Was responsible for the implementation of the Games By Mail system. He anstvers the [)3] help desk phone, so he has been extremely bUsy lately because Games By Mail cUstomers have been calling for assistance. He said the following: "The Games By Mail concept is great, but it has been difcult to get going. Moonwatcher Web Designers (MWD) programmed both the frontend. which is the part the customer sees, and the back-end, which is the database that tracks the games. MWD programmed the Website Very quickly but has not been available Very much since the 1Website Went live six months ago. We have had several crashes of the Website, and the only advice MWD has provided is to reboot the serVer. Considering all the money We paid to MWD to deVelop the site, Which at last count Was otter Hi5 million, I hoped for better service. "We Were able to same money by hosting WWW.GamesByMail.ca on an existing server. Became the Website needs to transfer credit card sales information daily to the accounting system, We Used the same server that runs our accounting system. r'E'nince MWD also programmed an antivirUs component right into the Website soWare, We did not hatI'e to purchase separate antivirUs softWare for tlle server. l have been alter MWD to provide LB with Updates to the antivirus soWare. MWD keeps promising us that updates will arriVe shortly. Thank goodness, We bake a great fireWalL so trimses cannot get access to the system in the rst place. "I am also not too WOIITiCd hecaUse We have a baekUp that I store olfsite, because 1 knoW hoW important that is for disaster recovery. The back Up noW does both the accounting data and the video game title database. l change the tape every Week and Whenever I do a backtip, it fmishes in about 10 seconds and ejects the tape right aWay. It used to take much longer to do the hack Up, but the MWD people must have done more than just tweaking When they installed the website. r'Ctne matter I am a little Won'ied about, though, is the shipping report produeed by the new system. Each day, the system generates and prints a shipping report and the addressed entI'elopes. The report indicates which Video game gets sent to Which cUstomer, and there is one envelope for each customer listed on the report The idea is that the inventory picker can find the lI.."ideo game and immediately put it in the matching addressed envelope to be shipped. However, I have noticed that sometimes the customer names that the system prints on the shipping report are different from the names it prints on the envelopes. Usually, it is not a big deal because We can correct the information in the system and jUst reprint the envelope. HoWever, it canses the shipping people to do additional manual work. "We Were also having a problem With the cUstomer login screen. CUstomers Would he denied access, even if they Were using their correct username and passWord. After repeatedly calling MWD, they dialed in to the system last night and applied a service pack to the Website to x the problem. Today, the login screen seems to he Working ne." "Lastly, I met With the Chair of DSl's board of directors, Malcolm Brodie. He dismissed hoW the board is trying to transform itself in light of DSl's recent e'Xpansion efforts and the disruptiye forces in the industry. There are no minutes from the board's meeting in the cuirent year; hoWetI'er, I Was able to put together some rough notes based on my meeting With Malcolm [Exhibit VI. Please revieW the II mkuimxr M\" m M "I met with Victor Ziegler, the controlling shareholder and CEDI of DSL a few months ago, and he told me about DSl's new initiatives for the current year. Here are my notes li'om that meeting {Exhibit ll}. Some new accounting issues have arisen as a result of these initiatiVes. I Would like you to look at them and provide your recommendations on the accounting treatments to adopt. 1 would also like you to prepare a separate report that we can provide to Victor to help him decide regarding a new initiative that is being considered for next year [Exhibit lll I. Exhibit}! Notes from Meeting with Vielor Ziegler on Current Year Initiatives After years of slow and steady growth, D51 began expanding in two directions. First, DSI opened ten new lvideo stores in 2020. In the past, DSI had only opened one store per year. Second. DSI moved into the lntemet-based video game rental bminess by launching a new website, wwwarnByMaiLca. The expansion was nanced by a Ill-year term loan from DSI's bank. Victor noted that the bank now seems concerned with the protability of the company. Given all the extra hours worked 'lhis year, Victor will be receiving a bonus of 2% ofnet income. I. No Late Fees {if} MARKS} D31 in'troduced a new program called "No Late Fees" during 2M0. Since people are oen reluctant to rent movies because they cannot retum them on time, DSl eliminated late fees for its customers. However, to prevent abuse of this program, after 30' days, if the movie is not returned, the outstanding movie is considered sold to the customer who rented it. The next time the cUstomer comes to the store, there will be a charge 01325. the price ofpurchasing a new DVD, on the customer's account, and the},r have the right to keep the DVD. The program has been "tremendously successful:I according to Victor. It has both increased rental revenue and increased sales of DVDs, since many customers keep their DVDs beyond the 3|] days. HoweVer, Victor conceded that it has Upset sorne cUstomers who believed that DSI had truly eliminated all forms of late fees. Most cUstomers who were charged for an over-3U-day DVD have ret'Used to pay for it and simply returned the DVD to a D31 store. lDthers have yet to pay for the DVD and have yet to return it. 2. Exchange with Stockton Home Video (1'0 MARKS) During the year, DSI exchanged $1,IIICi cash and varioua NettiI DVD inventory with a cost of $85,000 and a fair value of $96,000 with Blockster Home Video in exchange for 3,000 Model XT5W DVD players. D31 is going to sell the DVD players to its customers. The XT5005 can be purchased from vat-ions sUppliers, with a price range of $25 to $38 per unit. DSl sold DVDs similar to those traded to its cuatomers for $15 per unit last month. DSI has not recorded this transaction; as lVictor said, "it's really like nothing happened," he tells you "We gave them to inventory and they gave Us inventory. That's why I didn't record anything" 3. Games by MattRentot ngromfi't? MARKS} When cUstomers rst subscribe to the Games By Mail service at the store, they supply their credit card number and agree that it will be charged $30 at the end of each month until they cancel their subscription. To rent a video game, customers log on to the website using a user ID and passWord provided to them Once logged on, customers can choose Up to 40 video games to have in their "wish list." Customers can ag as urgent certain video game. The cUstomer is mailed his or her initial four lvideo games From the D51 WarehoUse in Toronto. These are selected automatically by the system based on availability of video games in the rental inventory, while giving priorin to those video games marked as urgent by the cuatomer. Dnce the cuatomer is nished playing a particular video game, he or she returns it by mail in a postagehpaid envelope. D61 then sends the customer the next video game on the list. During the introduction period of May 2.020, DSI offered new customers the option of paying $500 Up front for three years of video games rentals by mail and 5,000 cUstomers took advantage of this option due to its substantial savings. 4'. Games By MailDatabase Devei'opinantfj MAM) D61 has spent more than $425,000 to date researching and developing a patented database used to track orders and retunls of video games haul the Games by Mail program. The database is fully integrated with the Website. Victor Ziegler has determined that other companies, in various lines of business, could make Use of this technology. Essentially, D51 has developed an off-tbe-shelt' packaged inventory tracking database that other bUsinesses can purchase. It seems that D61 has spent $175,000 on research and an additional $250,000 on development. [151 capitalized the full $425,000 as an asset on the balance sheet. A breakdown ol'the costs is as folloWs: {in February I. 202], a re broke out in one of DSI's manufacturing buildings. By the tiroe the re 1.vas contained, tllere Was signicant property damage and some manufacturing assets Were unrecognizable. DSl's management has spent considerable time trying to gure out What was lost in order to quantify and support a claim for insurance purposes. Nothing has been reflected in the 2020 nancial statements because the event occurred Well after year end. It}. Depreciation [10 MARKS) During December, When depreciation expense Was being calculated, it Was discovered that several manufacturing assets had been coded to the 1Wrong general ledger account by the accounts payable clerk in the prior scal year. The assets had a total cost of $100,000 and, based on being coded as furniture and xtures. Were being depreciated straight-line over 10 years. DSl's claims a full year of depreciation in the year of acquisition. After detecting the issue, management recorded depreciation expense of $30,000 on these assets in 2020 because manufacturing assets should be depreciated straight-line over ve years at DSl's. This means the cumulative depreciation is notI $40,000, as required, and the assets are reported at net book value of $60,000. As changes in depreciation are treated as changes in accounting estimates, the change Was made prospectively and there Was no need to adjust the prior period nancial statements Exhibit Ht Notes from Meeting with Victor Ziegler on Possible Future Initiative D81 is evaluating the purchase of 20 Rent BoXcs, Which Would be located in highly populated areas 1Within the City of Toronto. Rent Boxes allow for the rental of DVDs and video games lIr'ia rental kiosks. Rent Boxes allow a cUstomer to select a DVD or video game, pay for the rents]I and receive the physical copy of the DVD or game all from a self-serve rental kiosk. [t is similar to a vending machine but for renting DVDs and video games. Customers must return the DVD or lvideo game to the same Rent Box alter a specied number of days. The Kent Boxes Would be located in popular areas sUcb as grocery stories, Big Box stores, and subway terminals