Marko Pharma Ltd. Marko Pharma Ltd. (MPL) is a biotech company that is involved in research and commercialization of products to treat a variety of human diseases and to boost human health. The company issued an IPO in the current year, and is traded on the Toronto Stock Exchange under the ticker MPL. The company also has bonds issued in the public market, which are currently yielding 8% Given the recent market volatility and global economic conditions, the share price of MPL has been under significant pressure. During its first year on the TSX, MPLS stock price has performed as follows: 700 650 Stock Price 5.50 5.00 450 4.00 3.50 3.00 2.50 200 A graph representing the stock prie during its first year on the Toronto The stock pricepeaked at around $6.50 per share, but has steadily declined since the company announced second-quarter earnings that missed analysts' expectations. Third quarter earnings met analysts' expects- tions, however, this did not prove to be a catalyst for share price appreciation Shareholders were upset with the weak IP issuing and are again becoming restless with the slumping share price. Shareholders are looking for management to generate shareholder wealth and there have been Tumblings that a shareholder activist group is looking to change top management at the upcoming annual meeting. The low share price has also led to speculation that MPL will be taken over by a larger biotech company through a hostile bid. The CFO is now preparing the annual financial statements for the year ended December 31, 2017, and considering the following transactions during the most recent quarter MPL recently attracted two new researchers to the company. The researchers were paid an upfront signing bonus of $350,000 each. The researchers come from a larger company and have a proven track record of developing profitable products. For sample, the researchers recently developed (in their previous employment a highly profitable testing procedure that detects early stages of prostate cancer. The procedure is estimated to generate in scess of $5 million in discounted cash flows. The researchers must work for MPL for a minimum of the years, or else the bonus must be repaid. MPL purchased a patented pharmaceutical drug for $3.4 million from a smaller company that does not have the resources to commercialize the product. The product treats kidney disease and is named odds. Generally, drug patients last for 20 years. However, the patient was applied for three years ago when clinical trials began. 2 Canadian Financial Accounting Cases The product has been recently approved by both Health Canada and the US Food and Drug Administration (FDA), and will be available to the market next year. Blodxs is expected to earn the following net cash flows: Fiscal 2018 - 31.250,000 Piscal 2019 - $750,000 Fiscal 2020 - $750,000 Prical 2021 - $750,000 Fiscal 2022 - $750,000 Fiscal 2033 - $750,000 Piscal 2014 - $750,000 Fiscal 2025 - $750,000 During the most recent quarter, MPL had a breakthrough in its research and development of a new protein supplement called Protein Protein successfully merges the benefits of whey and casein proteins in an ultra absorptive formula. The following costs were incurred on the project during the past quarter: Protein! - Costs Incurred Corts incurred in order to obtain government approvals and patente Purchase of equipment to be used to manufacture the protein supplement Materials and services consumed in development of formula I Payroll and consulting expenses incurred in the design of a logo and packaging Marketing of the product in fitness magazines Cost of efforts to refine, Improve, and enhance the formula Materials used in pre-production pilot testing $ 33,000 550.000 345,000 37.800 34.750 177.500 88.000 $1.266,050 Management is excited to launch this product as the protein supplement industry is large and grow ing. Both Health Canada and the U.S. FDA have approved the product, and a patent for the formula has been filed and approved. Protien is expected to generate net cash flows of $450,000 per year over the next five years MPI purchased a non-transferable right to distribute its products through a direct to-doctor sales company. The company visits doctors and hospitals and directly promotes the benefits of the products in order to sell the product. MPL paid $1.2 million to acquire the distribution rights for a four-year period, and must pay a royalty of 2% of all products sold through this outlet Management expects that there is a 55% chance that this new distribution arrangement will in crease total sales by 5%. Total revenue in the current fiscal year is $5,150,000. However, there is a 25% probability that sales could increase by as much as 10%, unda 20% probability that sales could increase by as little as 2N Required You have been hired as part of the accounting group The CFO has asked you to prepare a report that dis- cusses the appropriate accounting treatment of the transactions noted above. The CEO would like you to not only address recognition and initial measurement, but also bequeat measurement