Ian Mathews is a creator of board games. Ian will be selling his most recent game, Radical Rainbows, through his newly formed company, UPR, Inc. UPR was formed in June, 2018. Ian contributed $1,000 to UPR in exchange for 100% of UPRs voting common stock. Ian has had unprecedented success with the first two games in his most recent game trilogy: unicorns, ponies and rainbows. Ian was looking to finance UPRs initial production run of the third game, Radical Rainbows at a rate of 7.5% or less. The best deal offered by several banks had an APR of 8%. That was more than Ian was willing to pay and he felt there were other sources of financing that were less expensive.

As he had done for the first two games in the series: Unstable Unicorns and Perplexed Ponies, Ian turned to Kickstarter to finance the cost of the first production run of Radical Rainbows. Normally, UPR will be selling Radical Rainbows for $50 per game. UPR offered to sell Radical Rainbows to its Kickstarter backers for $45 per game. The Kickstarter campaign was completed in two days, and on June 1, 2018 UPR received $225,000 in exchange for a promise to deliver 5000 games to its Kickstarter backers on December 1, 2019.

At a manufacturing cost of $30 per game, UPR will be able to produce 7500 units with the $225,000 raised in the Kickstarter campaign. The 7500 games would be ready for shipment on December 1, 2019.

On June 1, 2018, UPRs bookkeeper made the following entry to record the receipt of cash:

ELEMENT	ACCOUNT DESCRIPTION	DEBIT	CREDIT
A	Cash*	$225,000
L	Deferred Revenue		$225,000

On December 1, 2019, UPR was able to deliver the 5000 board games to its Kickstarter backers. UPR also sold and delivered the additional 2500 games to other customers for the normal retail price of $50 per game. UPRs bookkeeper made the following entries to record these transactions:

ELEMENT*	ACCOUNT DESCRIPTION	DEBIT	CREDIT
A	Cash*	$125,000
L	Deferred Revenue	$225,000
R	Sales Revenue		$350,000
X	Cost of Goods Sold*	$225,000
A	Inventory*		$225,000

UPR used the $126,000 in cash available to UPR in December, 2019 to manufacture another 4200 board games. Those games were in finished goods inventory at December 31, 2019 and were sold in January, 2020 for $50 per game

UPRs Financial Statements at December 31, 2019 and 2018 as prepared by UPRs bookkeeper showed the following:

Balance Sheet
			12/31/19	12/31/18
Cash*			$0	$126,000
Inventory - Work in Process*			$0	$100,000
Inventory - Finished Goods*			$126,000
Total Assets			$126,000	$226,000
Deferred Revenue			$0	$225,000
Total Liabilities			$0	$225,000
Common Stock*			$1,000	$1,000
Retained Earnings			$125,000	$0
Total Equity			$126,000	$1,000
Total Liabilities and Equity			$126,000	$226,000
Income Statement
Revenues			$350,000	$0
Cost of Goods Sold*			$225,000	$0
Gross Profit			$125,000	$0
Expenses			$0	$0
Net Income			$125,000	$0

*You can assume that the Cash, Inventory, Common Stock and Cost of Goods Sold amounts as shown in both the journal entries and financial statements are correct.

Your analysis of this problem will involve using ASC 606 - Revenue from Contracts with Customers. UPR adopted ASC 606 when Ian formed the company in 2018. UPR has applied ASC 606 incorrectly.

You can assume that a contract is in place and that only one performance obligation exists: the delivery of the board game to the customer. Thus, determining the Transaction Price is the issue that needs to be addressed. The principles for the determining transaction prices can be found in ASC Subtopic 606-10-32-2 through 606-10-32-27. You may also want to refer to the illustrations (examples) contained in ASC 606. A list of the illustrations can be found at ASC Subtopic 606-10-55-93.

QUESTIONS TO BE ANSWERED

You must answer the following questions:

What are the additional entries or correct entries required on the following dates? If the entries made by the bookkeeper are correct, indicate Bookkeeper made correct entry. Otherwise use the Journal Entry template to record your answer and then paste into your answer.:

June 1, 2018

December 31, 2018 Adjusting Journal Entry

December 1, 2019

Use the attached Excel Template, show the corrected comparative Balance Sheet and Income Statement at December 31, 2019 and December 31, 2018. Paste the template into your answer

Using references to ASC 606 explain how your arrived at your answers in 1. And 2. Above.

From the point of view of a potential investor or lender to UPR, do the corrected financial statements or the original financial statements prepared by UPRs bookkeeper better reflect the economics of UPR during its initial two years in business? Why?

Corrected Balance Sheet 12/31/2019 12/31/2018 Cash* $0 $126,000 Inventory - Work in Process* $0 $100,000 Inventory - Finished Goods* $126,000 Total Assets $126,000 $226,000

Deferred Revenue $0 Total Liabilities $0 Common Stock* $1,000 $1,000 Retained Earnings- Accumulated Deficit $125,000 Total Equity $126,000 Total Liablities and Equity $126,000

Corrected Income Statement Revenues Cost of Goods Sold $225,000 $0 Gross Profit Expenses - Interest Net Income

You can assume that the Cash, Inventory, Common Stock and Cost of Goods Sold amounts as shown in the financial statements are correct. Also, the Balance Sheet at 12/31/2019 as prepated by UPR's bookkeeperis correct.