INTERMEDIATE ACCOUNTING I CASES Vision Security Enterprises stablished in 19 VSE has grown Vision Security Enterprises c. In order to urchase an exclush VSE current on Security Enterarises (VSE is a home and commercial security company. The company was establ " Luigi Bruce its sole shareholder to provide security services in Hallax. Since its inception, VSE provide its services across all major cities in Atlantic Canada in order to continue growing the company. Luigi has decided to expand into Ontano and Quebec. In ate the expansion, VSE is planning to become a franchiser whereby local entrepreneurs can purchase ant to be the Vision Security provider in their community. This is a significant change in strategy as VSE owns and operates all of the locations in Atlantic Canada. In order to help facilitate the strategic shift. Luigi hired Jason Armand early in the fiscal year as the of the Ontario and Quebec region, Jason is familiar with the franchisce-franchisor relationship as he employed at a large pizza restaurant chain. the new ra : he was formet opened throughout Ontario Luigi is very happy with the performance of lason thus far as 15 franchises have been opened throughou and Quebec during the year, along with five locations opened and operated by VSE. Luigi will have no ek signing Jason's bonus cheque, which is calculated as 10% of the operating income generated from the Ontario Quebec markets. You are the controller of VSE and recently began preparing for the December 31, 2020. year-end audith year-end audit will require more work this year because of the company's expansion, specifically the new franchi transactions. As you prepare for the audit, you review the preliminary income statement, as prepared by Jason, for the Ontario and Quebec segments (Exhibit I), along with information regarding various transactions that occurred during the year (Exhibit II). VSE prepares its financial statements in accordance with ASPE. Required Prepare a report that discusses the appropriate accounting treatments for the Ontario and Quebec markets. As report will be used as part of Luigi's evaluation of Jason's performance, be sure to discuss various alternative ing treatments Vision Security Enterprises Segmented Income Statement Ontario Quebec Total tal franchise for promotionale Initial franchise foregularrate Continuing franchise fee Security services $ 225 000 1.350.000 20.000 165.000 1.760,000 $ 450,000 1.350,000 20,000 137.500 1,957.500 $ 675.000 2.700.000 40,000 302.500 3,717,500 Expenses Advertising and promotion General and administrative Orice expense Professional fees Supplies and material Wages and benefits 113.500 98,700 97,750 37,620 97,590 394,550 840010 128,750 101,240 105,700 38.980 102.810 425.780 904 350 242 250 109.00 204540 76.000 200,700 820,330 1,744,360 Income from operations, protax $ 919.990 51.053.150 $1,973.140 Bonus $ 105,315 $ 197,314 Exhibirl A dditional Information Regarding the Ontario and Quebec Operations . Before the franchise agreement is signed, there is a period of discussion whereby the general feasibility of the new location is assessed. Market research is conducted and the prospective franchisee's financial strength is examined. VSE incurs all of the costs during this stage. During the year. VSE, franchised seven locations in Ontario and eight locations in Quebec. The franchise agreements were signed during the following months Jan 0 0 Feb 0 0 Mar 0 0 Apr 0 1 May 1 1 June 1 1 July 2 2 Aug 1 1 Ontario Quebes Sep 2 1 Oct 0 1 Nov 0 0 Dec 0 0 Total 7 As is standard in the franchise industry, VSE developed a policy to charge an initial franchise fee and a continuing franchise fee. The initial fee of $225,000 is paid through the following, nonrefundable payments: The franchisse mest pay a down payment of $25.000 when the franchise agreement is signed. Once signed. VSE will provide significant assistance to help the franchisee commence opera tions (eg. help select an appropriate location, train employees, develop policies and procedures, provide legal and manage ment assistance: however, the franchise is responsible to pay for all of the direct costs of establishing the new location . A d ayment of $50,000 is due once the franchisee com- mences operations. It takes approximately four to five months from sering the franchise areement to commencing operae one SES involvement with the franchisee largely ends when the new location commences operations. Five of the Seven locations Ontario are open and six of the eight locations in Quebec are open . The final payment of $150.000 is due within cae year of opera- tions commencing. VSE does not have any experience to assess the likelihood of a franchise surviving its first year. Each franchisee is required to pay $2,500 per month in a con tinuing franchise fee for VSE The continuing franchise fee covers various shared costs, such as regional advertisine, soft- ware and hardware upgrades, and ad hoc support Jason encouraged initial growth by providing a promotiocal agreement with the first three franchisers. These franchisers were charged an initial franchise fee of $225,000, due upon opening, with no continuing fee for the first three years three franchises are open and paid their initial fre There s(Continued) INTERMEDIATE ACCOUNTING I CASES the franchisees were E llAdditional Information Regarding ormation Regarding the Ontario and Quebec Operations (Co The following are number of months the franchise required to pay monthly franchise fees: Tranchises have been opened for a combined 10 months during the fiscal year. Dec. Nov Dec To Oct Sep Aug. July June May Jan 0 0 Feb 0 0 Mar 0 Apr 0 Ontario Quebec Mar 0 0 Apr 0 0 May 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 ation Customers No continuing franchise fees were collected from the franchises that signed an agreement in April and May. . During the year. VSE opened and operates two stores in Ontario (Toronto and Ottawa), and one store in Quebec (Montreal). The locations were opened late in the fiscal year but were still able to generate sales during November and December. The Ontario locations sold 30 security systems, while the Quebec locations sold 25 security systems. The security systems during the year were sold for the promotional price of $5.500, which includes the hardware, installation, and a two-year monitoring contract. The promotional price was issued with the hopes of attracting new business as VSE penetrates into the new markets. The normal retail price of the hardware alone is so with an additional $500 for installation Custom ont out of the two-year monitoring contract. Which will the price by $750. In addition, customers who already hardware can purchase the monitoring services for $12 systems have been instaled as of the year end. Jason undertook a large marketing campaign in November December 2020 with the intention of attracting new front and increasing awareness of VSE's service offering The advertising blitz is going to run into January 2021. Jason believes that the benefits of the marketing program will be realized in the next year. Accordingly, he capitalized $250.000 marketing costs as at year end in order to match the costs to sales in future periods. INTERMEDIATE ACCOUNTING I CASES Vision Security Enterprises stablished in 19 VSE has grown Vision Security Enterprises c. In order to urchase an exclush VSE current on Security Enterarises (VSE is a home and commercial security company. The company was establ " Luigi Bruce its sole shareholder to provide security services in Hallax. Since its inception, VSE provide its services across all major cities in Atlantic Canada in order to continue growing the company. Luigi has decided to expand into Ontano and Quebec. In ate the expansion, VSE is planning to become a franchiser whereby local entrepreneurs can purchase ant to be the Vision Security provider in their community. This is a significant change in strategy as VSE owns and operates all of the locations in Atlantic Canada. In order to help facilitate the strategic shift. Luigi hired Jason Armand early in the fiscal year as the of the Ontario and Quebec region, Jason is familiar with the franchisce-franchisor relationship as he employed at a large pizza restaurant chain. the new ra : he was formet opened throughout Ontario Luigi is very happy with the performance of lason thus far as 15 franchises have been opened throughou and Quebec during the year, along with five locations opened and operated by VSE. Luigi will have no ek signing Jason's bonus cheque, which is calculated as 10% of the operating income generated from the Ontario Quebec markets. You are the controller of VSE and recently began preparing for the December 31, 2020. year-end audith year-end audit will require more work this year because of the company's expansion, specifically the new franchi transactions. As you prepare for the audit, you review the preliminary income statement, as prepared by Jason, for the Ontario and Quebec segments (Exhibit I), along with information regarding various transactions that occurred during the year (Exhibit II). VSE prepares its financial statements in accordance with ASPE. Required Prepare a report that discusses the appropriate accounting treatments for the Ontario and Quebec markets. As report will be used as part of Luigi's evaluation of Jason's performance, be sure to discuss various alternative ing treatments Vision Security Enterprises Segmented Income Statement Ontario Quebec Total tal franchise for promotionale Initial franchise foregularrate Continuing franchise fee Security services $ 225 000 1.350.000 20.000 165.000 1.760,000 $ 450,000 1.350,000 20,000 137.500 1,957.500 $ 675.000 2.700.000 40,000 302.500 3,717,500 Expenses Advertising and promotion General and administrative Orice expense Professional fees Supplies and material Wages and benefits 113.500 98,700 97,750 37,620 97,590 394,550 840010 128,750 101,240 105,700 38.980 102.810 425.780 904 350 242 250 109.00 204540 76.000 200,700 820,330 1,744,360 Income from operations, protax $ 919.990 51.053.150 $1,973.140 Bonus $ 105,315 $ 197,314 Exhibirl A dditional Information Regarding the Ontario and Quebec Operations . Before the franchise agreement is signed, there is a period of discussion whereby the general feasibility of the new location is assessed. Market research is conducted and the prospective franchisee's financial strength is examined. VSE incurs all of the costs during this stage. During the year. VSE, franchised seven locations in Ontario and eight locations in Quebec. The franchise agreements were signed during the following months Jan 0 0 Feb 0 0 Mar 0 0 Apr 0 1 May 1 1 June 1 1 July 2 2 Aug 1 1 Ontario Quebes Sep 2 1 Oct 0 1 Nov 0 0 Dec 0 0 Total 7 As is standard in the franchise industry, VSE developed a policy to charge an initial franchise fee and a continuing franchise fee. The initial fee of $225,000 is paid through the following, nonrefundable payments: The franchisse mest pay a down payment of $25.000 when the franchise agreement is signed. Once signed. VSE will provide significant assistance to help the franchisee commence opera tions (eg. help select an appropriate location, train employees, develop policies and procedures, provide legal and manage ment assistance: however, the franchise is responsible to pay for all of the direct costs of establishing the new location . A d ayment of $50,000 is due once the franchisee com- mences operations. It takes approximately four to five months from sering the franchise areement to commencing operae one SES involvement with the franchisee largely ends when the new location commences operations. Five of the Seven locations Ontario are open and six of the eight locations in Quebec are open . The final payment of $150.000 is due within cae year of opera- tions commencing. VSE does not have any experience to assess the likelihood of a franchise surviving its first year. Each franchisee is required to pay $2,500 per month in a con tinuing franchise fee for VSE The continuing franchise fee covers various shared costs, such as regional advertisine, soft- ware and hardware upgrades, and ad hoc support Jason encouraged initial growth by providing a promotiocal agreement with the first three franchisers. These franchisers were charged an initial franchise fee of $225,000, due upon opening, with no continuing fee for the first three years three franchises are open and paid their initial fre There s(Continued) INTERMEDIATE ACCOUNTING I CASES the franchisees were E llAdditional Information Regarding ormation Regarding the Ontario and Quebec Operations (Co The following are number of months the franchise required to pay monthly franchise fees: Tranchises have been opened for a combined 10 months during the fiscal year. Dec. Nov Dec To Oct Sep Aug. July June May Jan 0 0 Feb 0 0 Mar 0 Apr 0 Ontario Quebec Mar 0 0 Apr 0 0 May 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 ation Customers No continuing franchise fees were collected from the franchises that signed an agreement in April and May. . During the year. VSE opened and operates two stores in Ontario (Toronto and Ottawa), and one store in Quebec (Montreal). The locations were opened late in the fiscal year but were still able to generate sales during November and December. The Ontario locations sold 30 security systems, while the Quebec locations sold 25 security systems. The security systems during the year were sold for the promotional price of $5.500, which includes the hardware, installation, and a two-year monitoring contract. The promotional price was issued with the hopes of attracting new business as VSE penetrates into the new markets. The normal retail price of the hardware alone is so with an additional $500 for installation Custom ont out of the two-year monitoring contract. Which will the price by $750. In addition, customers who already hardware can purchase the monitoring services for $12 systems have been instaled as of the year end. Jason undertook a large marketing campaign in November December 2020 with the intention of attracting new front and increasing awareness of VSE's service offering The advertising blitz is going to run into January 2021. Jason believes that the benefits of the marketing program will be realized in the next year. Accordingly, he capitalized $250.000 marketing costs as at year end in order to match the costs to sales in future periods