You, CPA, an audit senior at Columby & Co., Chartered Accountants, are in charge of this years audit of Showcase Corporation (SC). SC is a rapidly expanding, diversified, publicly owned entertainment company with operations throughout Canada and the United States. SCs operations include movie theatres, live theatre production, television production, and a 60% interest in Media Inc. (Media), a company that specializes in entertainment-related advertising and promotion.

It is June 22, 2020, the week before SCs year end. You meet with the chief financial officer of SC to get an update on current developments and learn the following.

SC acquires real estate in prime locations where an existing theatre chain does not adequately serve the market. After acquiring a theatre site, the company engages a contractor to construct the theatre complex. During the year, the company received a $2 million payment from one such contractor who had built a 10-theatre complex for SC in Montreal. This payment represents a penalty for not completing the theatre complex on time. Construction began in June 2019 and was to have been completed by December 2019. Instead, the complex was not completed until the end of May 2020.

The company is staging a Canadian version of Rue St. Jacques, which is to open in November 2020. The smash-hit musical has been running in Paris for three years and is still playing to sold-out audiences. SC started receiving advance bookings in November 2019, and the first 40 weeks of the shows run are completely sold out. Average ticket prices are $65; the show will play seven nights a week. The theatre used for the production is relatively small, with about 1,200 seats. As at June 22, 2020, SC had included in revenue $1.7 million of interest collected on the funds received from advance ticket sales. In addition to the substantial investment in advertising for this production ($4 million), the company will have invested $15 million in pre-production costs by November 2020 and will incur weekly production costs of $250,000 once the show opens.

About 80% of Medias business is directly related to promoting SCs activities. Media bills SCs corporate office for all advertising and promotion related to SCs activities. Advertising and promotions have significantly increased this year, in part due to large costs associated with the forthcoming opening of Rue St. Jacques. Media has billed SC $12 million this year for advertising and promotion, an increase of $7 million over the preceding year.

SC has $43 million invested in Government of Canada treasury bills. During the past year, a portion of these treasury bills was set aside to cover interest and principal obligations on the companys syndicated loan of US$25 million. At the time the loan agreement was signed, SCentered into a forward contract to buy US dollars for the same amounts as the obligations under the syndicated loan and for the same dates as the obligations came due. SC considers that in substance the debt has been settled and, as a result, both the treasury bills and the syndicated loan have been removed from the companys balance sheet.

SC started selling movie theatres a couple of years ago. Each theatres contribution to long-run operating cash flow is assessed and, if the value of the real estate is greater than the present value of future theatre operating profits, the theatre is sold. In the past, revenue from these sales has been relatively minor, but this year 25% of net income (i.e., $6 million) came from the sale of theatres. Since these sales are considered an ongoing part of the companys operations, proceeds from the sale of theatres are recorded as revenue in the income statement.

On May 31, 2020, SC and an unrelated company, Odyssey Inc. (Odyssey), formed a partnership, Phantom. Odyssey contributed $40 million in cash. SC contributed the assets of its TV production company, which had a net book value of $65 million. The $90 million value assigned to SCs contribution may be adjusted if the net income of Phantom earned between July 1, 2020, and June 30, 2021, does not meet expectations. SC has recorded a gain of $25 million. The partnership agreement states that SC is permitted to withdraw the $40 million for its own use, and it has done so. As a result, Odyssey has a 45% interest in the partnership and SC has the remaining 55% interest.

When you return to the office, you discuss these issues with the partner in charge of the SC audit. She asks you to prepare a report on the accounting implications of the issues you have identified as a result of your meeting.