“The thing you have to understand is how these stage plays work. You start out with just an idea, but generally no cash. That’s where promoters like me come in. We find ways of raising the money necessary to get the play written and the actors trained. If the play is a success, we hope to recover all those costs and a whole lot more, but cash flow is the problem. Since less than half of all plays make money, you cannot get very much money from banks.

“Take my current project, Penguins in Paradise (PIP). You only have to look at the cash inflows to see how many sources I had to approach to get the cash. As you can see, most of the initial funding comes from the investors in the limited partnership. They put up their money to buy a percentage of the future profits of the play. “The money that the investors put up is not enough to fund all the start up costs, so you have to be creative. Take reservation fees, for example. You know how tough it is to get good seats for a really hot play. Well, PIP sold the right to buy great seats to some dedicated theatregoers this year for next year’s performance. These amounts are nonrefundable, and the great thing is that the buyers still have to pay full price for the tickets when they buy them.

“Consider the sale of movie rights. Lots of good plays get turned into movies. Once the stage play is a success, the movie rights are incredibly expensive. My idea was to sell the movie rights in advance. PIP got a lot less money, but at least we got it upfront when we needed it.

“The other sources are much the same. We received the government grant by agreeing to have at least 50% Canadian content. We also negotiated a bank loan with an interest rate of 5% a year plus 1% of the gross revenue of the play, instead of the usual 16% annual interest a year. Even my fee for putting the deal together was taken as a percentage of the profit, so just about everybody has a strong interest in the play’s performance.”

Required:

Prepare a memo addressing the major financial accounting issues to be established by PIP. Include your recommendations. Do not prepare financial statements.

Summary of Cash Flows for the Period Ended 31 December 20X4

(in thousands of dollars)

Cash inflows:
Investor contributions to limited partnership .......................................   $6,000
Bank loan ...................................................................................................    2,000
Sale of movie rights ...................................................................................      500
Government grant .....................................................................................        50
Reservation fees ........................................................................................        20
                                                                                                                           8,570
Cash outflows:
Salaries and fees for rehearsal period ..................................................    3,500
Costumes and sets ..................................................................................    1,000
Miscellaneous costs ................................................................................    1,260
5,760
Net cash inflows ....................................................................................   $ 2,810