Margot and Aristidis, two visual artists, moved from Canada to the south of France to pursue their lifelong dream of owning and operating a studio and vacation retreat in the French countryside. Using a substantial portion of their inheritance, they purchased a 15 room chateau and adjacent property which included a kitchen garden, small vineyard and a barn-like structure that could be used as a studio and artists workshop. The $8,000,000 purchase price was a package deal but real estate estimates revealed that the approximate fair value of the vineyard property on a standalone basis was $4,000,000. Once the Chateau was renovated, it was believed that its potential value in use would be at least $10,000,000.

In order to move the contents of their Westmount estate, their unsold art, their studio equipment and supplies, they were obliged to ship their belongings to France by ocean freighter at a cost of $100,000 plus freight insurance of $150,000. That insurance gave them coverage of $5,000,000, in the event of loss or damage. Unfortunately, a major storm in the Atlantic destroyed some of the shipping container contents and 6 of Aristidis prized bovine sculptures, one of which was commissioned by the Contemporary Museum of Paris at a price of $960,000, were lost at sea. Luckily, the museum has indicated that it would pay the same amount for a similar replacement as they felt he was an up and coming artist and that their collection would not be complete without one of his works. Four other sculptures were damaged, but salvaged, and can be melted down and reworked. The cost of the copper included in each of the lost sculptures was in the $60,000 to $70,000 range. At the time the sculptures were made, the market price of copper was 90% of the current market price. Aristidis was devastated as he had spent an average of 1,000 hours of his own time on each sculpture.

Upon arrival in France, while awaiting their shipment of belongings, they quickly got to work renovating their house. The major renovations accomplished in the first several months included the following expenditures:

	Canadian $
Building permits and licences	13,000
Architect fees	40,000
Plumbing supplies	62,000
Plumbing labour	110,000
Basement excavation and debris removal (to remove old pipes)	400,000
Fireplace repairs and brickwork (there was a fireplace in every room)	38,000
Transportation and food costs for workers who lived more than 50 km away from the worksite (as per French law)	12,000
Cash paid to inspector to guarantee the work passed the code inspection (inspector said that was customary )	10,000
Legal costs for incorporation of M & A Inc.	15,000
Plastering	85,000
Paint and decoration (purchased)	100,000

Although approximately 70% of the planned major basement and plumbing work was accomplished by the end of four months, the basement excavation revealed buried treasure as there was a secret passage that connected part of the house to a nearby monastery that had been used to hide those fleeing persecution during the war. Early archeological excavation revealed that there were hidden works of art and historically significant documents buried deep in the cellar floor. This discovery required that the work be stopped, that the affected area be cordoned off, and that the long wait for the Department of Heritage and Cultural Patrimony begin. Normally, the government did not compensate owners in such circumstances, but considered the affected area to be under government control and prevented use of the specific space for personal reasons, until such time as the government authorities determined which items the state had the right to, and which items the property owners could claim. During the ongoing period of investigation, the owners were normally permitted to use the unaffected space as they wished. Due to the investigation, it meant that 30% of the chateau, could not be updated and therefore, could not be used for living nor for the planned vacation retreat. The authorities cannot estimate when the investigation will be over and the renovations can resume.

Although Margot and Aristidis were frustrated and delayed by this unexpected finding they were finally ready to open their vacation retreat, in early 2013. Thus far, the 8 available rooms have been fully rented and there is a waiting list to reserve at the establishment. Margot and Aristidis are living in the only other two fully renovated rooms at the chateau.

With year-end approaching, the couple has approached you, CPA, to request help with understanding how to account for all of their endeavours and guidance in the financial accounting areas that you think are relevant for them, in their situation. Since they also want to start off next year on the right foot, they hope you will include and additional comments that will be pertinent in the future as well.

In addition, the couple has applied for a $3,000,000 loan at their local bank to obtain the funds they will need to turn the barn into a state of the art studio where they plan to work and give classes to aspiring artists. The loan can be obtained at an interest rate of 2%. The renovated studio should be ready for use by January 1, 2015. They believe that they can charge $1,500 a week per studio class attendee. The loan will be drawn on over the course of the work to be done, which is planned to be as follows:

Feb. 28, 2014	1,000,000
April 30, 2014	200,000
June 30, 2014	300,000
October 31, 2014	1,500,000

Margot has also asked that you let her know how to treat the costs of the studio renovation. Also, she is curious as to how to figure out what the cost of the art classes should be. Aristidis has also asked if you could help him determine the appropriate amount to include on his insurance claim for the loss of his sculptures and is now concerned that he may not have bought sufficient insurance. The sculpture that was commissioned by the museum was exceptional in that its selling price was $960,000, but his works have been climbing in value recently and all of his sculptures have been selling for at least $500,000, since he started working them in copper. Margots paintings vary in selling price but average about $10,000 each. Twenty of her works were damaged in transit.

All of the artworks created by the couple are original and theoretically protected by copyright laws, although with the exception of 3 specific paintings by Margot, none of the other works have been legally registered. The 3 paintings that have been registered have been reproduced as numbered prints. Recently, one of Margots friends sent her a birthday card which included an image that was so similar to one of these works, that Margot was astounded. The card was produced by a company called Imagerecyclers. Margot had never given this company the authority to use this image, nor had the authorized reproducers of her numbered print. Margot had already contacted a lawyer specializing in copyright infringement and was told that it would cost about $100,000 in legal fees but that he was quite certain that he would win a lawsuit against Imagerecyclers and that it was unlikely that a settlement would be less than $500,000.

Margot and Aristidis have created a corporation M & A Inc. through which they will run all of their business ventures- the vacation retreat room rentals, the art studio classes and their art business. They would like you to provide them with sufficient detail for the accounting treatment of all the issues raised so that they can know what to include wherein their financial statements and for them to understand what their choices are and why things are being suggested one way, as opposed to another. They are both picture people so if you could prepare partial financial statements so they can see what it will all look like, they would find it helpful.

Required

Prepare a report to Margot & Arsitidis to respond to their questions and requests.