Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

I am trying to solve a case study for the course Intermediate Accounting 2 Beechy Volume two. I am trying to find out what principles

I am trying to solve a case study for the course Intermediate Accounting 2 Beechy Volume two.

I am trying to find out what principles to apply to solve case here.

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 CI's 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 asCheck 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 sellCheck Me Outto clothing retailers. Bank loans are not an option for financing because of the perceived risk of CI. CI's founders believe that a takeover by a large technology company or on-line retailer is the best outcome for all.

Check Me Outenables a shopper to upload personal photographs to a clothing retailer's website, once the retailer is a client ofCheck Me Out. These photographs are translated into a 3-D image of the shopper. The shoppers can then virtually "try on" the retailer's clothing and view the resulting images from almost 100 different angles. The technology has received positive feedback, and CI's 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, CI's founders attended several trade shows to promoteCheck 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.

this is the issue I want to solve.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Accounting

Authors: Carl Warren

13th Edition

1133607616, 978-1133607618

More Books

Students also viewed these Accounting questions