GROUP PROJECT $$ CASE ANALYSIS Creative Systems Co$.($Creative$)$ is a privately held corporation specializing in learning management systems solutions in the digital environment. Their proposed solutions, similar to Blackboard, for example, are implemented in small post$-$secondary education institutions across Canada. The company has been operating from its headquarters in Vancouver since January $2,2020.$ Creative financial statements are unaudited and prepared in accordance with ASPE. Revenue The selling price of Creative system solution is $$40,000$ per educational institution over a $4-$year period. The price covers both, the access to a platform interface and the hardware $($such as workstation, projector, and printer$)$ at $$30,000$ and $$10,000$ respectively per client. Additionally, Creative also provides customized software solutions to cater to the specific educational issues. Such customization will be an additional cost for the post$-$secondary institutions. Creative prides itself in providing a one$-$stop system solution for their clients. As such, the company has partnered with Stellar Technologies Co$.($Stellar$)$ that provides the hardware to Creative$$ clients. Through this partnership, Stellar pays Creative a referral fee which is $10\%$ of hardware cost for every sale. Since its inception, the company has recognized all its revenue at the time of sale upon receipt of a signed contract. From the date the contract is signed, Creative takes an average of three $(3)$ months to establish functionality: from project implementation, hardware setup, to training. At the end of $4$ years, there is an annual fee for the software license renewal which is $$1,500$ per each contract sold to the post secondary education institution. The amount is automatically and fully recorded at the time when the software license expires. Here are the annual historical revenues: Year $2020$ Year $2021$ $$1,200,0001,600,000$ Year $2022$ Year $20222,100,0003,000,0001|$ P a g e Accounts Receivable Given the relation developed with the customers, Creative writes off only when any payment becomes uncollectible. In late $2022,$ to improve the cash flow and liquidity, the company decided to factor $$80,000$ of its receivable with recourse. The company removes $$80,000$ from its accounts receivable and recorded an interest expense of $$5,000.$ Computer Equipment In $2020,$ Creative had purchased its computer equipment in Gander $($Newfoundland and Labrador$).$ Related transportation cost amounted to $$12,000.$ Insurance while in transit was $$20,000.$ The company also had to pay technical engineers to install and setup the equipment, costing $$13,000.$ Start$-$up and testing costs were $$5,000.$ Total expenditure $$50,000$ was fully expensed in $2020.$ In January $2023,$ the company traded one of its IBM server $($Model $19)$ with a newer HP server $($Model $23).$ Below are the details of the exchange. Based on the technical specifications, the new HP server will result in improved level of efficiency for the development team at Creative. At the same of exchange, Creative considered the transaction without commercial substance. P$8-48$ Historical cost of IBM server $20$ Accumulated depreciation of IBM server $20$ $$195,00035,000$ Fair market value of IBM server $20$ Fair market value of HP server $23170,000185,000$ Cash paid $15,000$ For the year ended Dec $31,2023$ the company controller gathered the following information on the computer equipment. Despite evidence from internal reporting shows performance below expectations, no impairment was recognized. The company has not conducted any revaluation or impairment since inception. Refer to P$10-19$ Original cost Accumulated depreciation $$650\mathrm{.}000260,000$ Fair value Costs to sell $370,00010,000$ Incremental cash flow $202090,0002|$ P a g e Incremental cash flow $2021$ Incremental cash flow $202280,00070,000$ Incremental cash flow $2023$ Incremental cash flow $2024$ to $202960,00020,000$ Cost of capital $2\%$ Government Grant The Canadian government is actively promoting e$-$solutions to assist small post$-$secondary education institutions across Canada. In $2020,$ the federal government provided a forgivable loan of $$200,000$ to assist Creative with the purchase of computer equipment which is estimated to have a useful life of $10$ years. When the funding was received, the company treated it as a normal expense debiting cash and crediting other income. The loan would be forgiven over five years on the condition that the company employs at least two recent graduates per year in the software development at Creative. The company has managed to fulfill this condition except in $2022$ where it did not hire any recent graduates in the software development department. Investment During $2021,$ Creative purchased $6,000$ Royal Bank shares for $$31$ per share $($total $$186,000).$ Creative designated $50\%$ of Royal Bank shares as FVPL while irrevocably elected to record the remaining $50\%$ as fair value changes through OCI. P$7-35$ Creative held these shares until October $2023,$ when it sold th