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Rosetta Inc.

Rosetta Inc. (RI) is a new corporation that just acquired the assets of an unincorporated technology business on September 1, 2016, from Jess Stone. Extracts from the purchase and sale agreement entered into by RI and Jess Stone are provided in Exhibit I. RI is owned by three shareholders: Carlos Guevara, the CEO of RI, who owns 20% of the shares of RI; and two investors, who each own 40% of the shares. Jess Stone is not a shareholder of RI.

Jess Stone developed new touch screen technology but lacked the financial resources necessary to benefit commercially from this technology. The touch screen technology is far superior to the current technology, and has many potential uses, ranging from mobile devices, computer screens, and laptops.

RI put the technology it purchased to work immediately by entering into a licensing agreement with Mica Inc. (Exhibit II). In addition, RI has developed a new PC computer monitor with the touch screen, and entered into an agreement with Ferrous Inc. to distribute the technology.

You, CPA, have been recently employed by RI as the special assistant to Carlos Guevara. On July 3, 2017, Carlos calls you into his office and says he has an assignment for you:

The financial statements of RI for the fiscal year ending August 31, 2017, are required to be audited. I want you to address the significant financial accounting issues pertaining to the preparation of RIs financial statements for its first fiscal year ending August 31, 2017, and provide your recommendations on the accounting treatments to be used.

As you leave Carloss office, he provides you with a file that includes some additional information about the operations of RI (Exhibit III).

Required

Prepare a report that addresses the requests of Carlos Guevara.

EXHIBIT I EXTRACTS FROM THE PURCHASE AND SALE AGREEMENT BETWEEN RI AND JESS STONE

Purchase and Sale of the Business Assets of Jess Stone

RI will purchase the technology and the research findings of Jess Stone as at September 1, 2016 RI agrees to purchase the equipment owned by Jess Stone as at September 1, 2016 Jess Stone agrees to be responsible for all liabilities as at September 1, 2016

Purchase and Sale Price

RI will pay to Jess Stone an amount of $3.5 million for the technology and the research findings RI agrees to pay to Jess Stone the appraised value of $420,000 for the equipment

Contingent Consideration

RI agrees to pay to Jess Stone an amount equal to 50% of net income (determined in accordance with generally accepted accounting principles) in excess of $500,000 for the fiscal year ending August 31, 2017

Employment Contract with Jess Stone

RI and Jess Stone agree to enter into a two-year employment contract, and RI agrees to pay to Jess Stone an annual salary of $200,000

Jess Stone agrees that all research findings during the employment are the property of RI

EXHIBIT II EXTRACTS FROM THE LICENSING AGREEMENT

BETWEEN RI AND MICA INC.

Licensing Arrangement

RI agrees to provide to Mica the exclusive right to use the touch screen technology referred to as FeldsparX for a term of three years commencing on December 1, 2016

RI agrees to deliver the technology to Mica on December 1, 2016

Mica agrees to pay to RI a licensing fee in the amount of $900,000, with the first payment of $300,000 due on December 1, 2016; and, agrees to make payments in the amount of $300,000 plus interest of $36,000 on December 1, 2017, and $300,000 plus interest of $18,000 on December 1, 2018

Royalty

Mica agrees to pay to RI a royalty fee in the amount of 15% of the gross margin (determined in ac cordance with generally accepted accounting principles) realized by Mica from sales of goods that use the FeldsparX technology

Mica agrees to provide to RI a quarterly statement of gross margin realized by Mica that is subject to the royalty payable to RI

RI, or its representative, has the right of access to the records and information of Mica necessary to audit the gross margin reported by Mica to RI

EXHIBIT III INFORMATION OBTAINED ABOUT THE OPERATIONS OF RI

Licensing Arrangement with Mica

Revenue in the amount of $300,000 has been recognized in the accounting records

Royalty revenue in the amount of $135,000 has been recognized in the accounting records based on a gross margin of $900,000 reported by Mica for the six months from December 1, 2016 to May 31, 2017

Mica is a financially sound entity Research and Development

RI acquired the following technology and research findings from Jess Stone:

Project Technology/ Assigned Name Fair Value

FeldsparX $ 700,000 QuartZ 1,500,000 BasalT 900,000 Grandiorite 400,000

$3,500,000

Current Status

licensed to Mica for three years (see Note 1) used in the commercial production of goods (see Note 2) used in the commercial production of goods (see Note 3) testing use in a possible product

Note 1 - FeldsparX Technology: Management of RI decided to license use of the FeldsparX technology rather than to produce goods using this technology itself. Management expects that this technology will have a useful life of three years.

Note 2 - QuartZ Technology: Management of RI estimates that the QuartZ technology will generate total revenue in the amount of $7.5 million over a four-year period commencing December 1, 2016.

Note 3 BasalT Technology: Management estimates that the BasalT technology will generate total rev enue in the amount of $2.7 million over a three-year period commencing March 1, 2017.

Jess Stone has started work on a new project, Kryptonite, after becoming an employee of RI and this project is presently in the conceptual formulation state of a possible product that uses the technology.

A research and development asset in the amount of $3.5 million is reported on RIs statement of finan cial position as at May 31, 2017. All research and development costs incurred by RI have been expensed in the accounting records.

identify the role you are playing;

assess the financial reporting landscape, considering the user needs, constraints, and business environment;

identify the issues

analyze the issues (qualitatively and quantitatively); and

provide a recommendation and conclusion.