Sheilas Make it Look Easy (SMILE) fitness studio is new premium athletic club located just outside of Toronto. SMILE is partially owned, and operated by Sheila Rose, an elite personal trainer. Sheila has dedicated her life to helping others by breaking stigmas, and changing her clients perspective on working out, and healthy living. In 2016, Sheila decided to combine her passion for fitness with her entrepreneurial skills and opened a local gym. In order to finance the purchase and renovation of the facility, Sheila borrowed $500,000 from a wealthy client, Wendy Smith, who that she had been training for years. At the time, Wendy was looking for a new business venture, and with Sheila running the operations, she knew it the gym was destined to success. The funds were used to help with purchasing the land and buying all of the equipment. Sheila invested $500,000 of her own money. Since Wendy had no desire to be actively involved in the business, they decided that a split of 65% ownership for Sheila, 35% ownership for Wendy would be best. Wendy is looking to sell their ownership interest and capitalize on the growth in the gym. Sheila and Wendy have a few interested investors, and they have been asked to provide GAAP compliant financial statements. Wendys sale price will be based on industry norms, which would be approximately 1.3-1.5 times the current year earnings. SMILE is projecting to earn $425,000 for the year ended June 30, 2022. It is now July 10, 2022, SMILE has hired you to help provide them with advice on their accounting policies for the year ended June 30, 2022. Sheila has provided you with the following information about some of their marketing programs during the year (Exhibit I). Sheila has provided you with the following information about some of their marketing programs during the year (Exhibit I).

Exhibit I Additional Information about SMILE Fitness Studios In order to attract new customers, Sheila implemented the following programs: - 8 Week Challenge Member can sign up to participate in an 8-week challenge where they sign up for a combined meal and workout plan with other members at the gym. The first challenge ran from February 3 March 31, and a second one is now running from June 2 July 28. New and existing members can sign up for a cost of $550. Included in their package is a fully customizable meal plan, unlimited bootcamp classes, and 6 personal training sessions over the 8-week period. If during the 8-week period, members are dissatisfied with their progress and results, 50% of their fee will be refunded. SMILE currently has 85 members signed up for the program. During the February pilot, only a few members requested a refund. SMILEs policy is to recognize revenue when the members sign up for the challenge. - SMILE Points SMILE has started a member rewards program offering 1 SMILE per visit to the gym. SMILE Points can be redeemed towards the cost of any item at the protein caf (sells water, coffee, protein bites and protein shakes). Sheila estimates that approximately 22,000 points have been granted to members. When a member accumulates 10 SMILE points, they can redeem them for a $5 item from the protein caf. To date, nothing has been recorded in the financial statements. - During the year, SMILE hired MacDesign, a photography business, to film and photograph Sheila performing various exercises to post on social media to help promote the facility. In exchange for providing the edited material, Sheila paid $8,500 in total. This amount was recognized as an expense.

Analysis: For each issue, you should attempt to apply the CPA Way, including: - Assess the Situation - Analyze Major Issues - Conclude & Advise