constance

CASE 14-2 CONSTANCE INC. Constance Inc. (CI) is a small private company located in Miramichi, New Brunswick. CI was incorpora in late 20X0 and has 10 common shareholders, consisting of two founders and eight of the founders' friends and relatives. At the time of CI's incorporation, each shareholder was issued 200,000 common shares. In 20% CI completed development of technology that has the potential to revolutionize online clothing shopping. The technology, patented in 20X1 as Check Me Out, was sold to one major online clothing retailer in 20X1. Durine fiscal 20X2, an additional seven on-line clothing retailers purchased the technology. However, now, in early 20X3. cash is tight at CI. Current investors do not have the personal resources to invest further, yet CI desperately needs more cash to market and sell Check Me Out to clothing retailers. Bank loans are not an option for financin because of the perceived risk of CI. CI's founders believe that a takeover by a large technology company or on-line retailer is the best outcome for all. C e nables a superio r esonal photographs to a clothing real is a client of Cher Me Our. These phr as are translated into a D image of the shopper. The shoppers Owl. These photographs are translated into a can then virtually "try on the retailers me retailer's clothing and view the resulting images from almost 100 dierent anges e The technology has received I will be ass Ved sitive fe e rs are confident that n d technology firms have started to show interest in clasa takeover target Shareho firms up in this regard in the next 6 to 12 months ried to show interest in Clasa takeover target Shareholders are hoping that something The founders of CT are not knowledgeable in the area of financial acco owledgeable in the area of financial accounting. They realize the importance of understandable financial statements and make sure all applicable accounting stan this reason, they engage the firm of Martin and Leaves Public Accountants to ant to make sure all applicable accounting standards are followed. For the 20x3 fiscal year. You are a co-op student working at Martin and Leaves. of Martin and Leaves Public Accountants to advise on accounting transactions in ale a co-op student working at Martin and leaves, with a strong handle on inimene accounting topics. For this reason, you have been asked to evaluate several issues on you have been asked to evaluate several issues raised by C and prepare mendeng your analysis, aditional in mendations. CI prepares its finance statements in accordance with IFRS. You know that wential purchasers of CW EBITDA (earnings before interest, tax, donciation, and amortization with IFRS. You know that potential purchasers of CI will be very interested in reported In January 20X3. CI's founderstand al o ne Check Me Out. The cost to attend these trade shows was quite high. Since Cuddh b h o several hundred thousand hes trins a CI shareholder cashed in a thousand loyalty points carned through a srstiteand to cover the flights and hotels. In exchange Cissued 000 common shares to the shareholder Clisuu s Issued might be worth $25,000 based on informal disrussians with a technology company that has expressed to how to read this transaction. The shares interest in acquiring CI. Issue 2: Cl is currently engaged in a legal case over the patent for Check Me Out Mark Ramsey, the ex-boyfriend of one of CI's founders, has filed suit against CL Ramsey claims that Check Me Out was his idea. He is suing CT for $2.500.000, CI claims that the suit is reposterous and completely impossible to prove. Nothing has been recorded in the financial statements with respect to this lawsuit. Legal advice has yet to be sought. Issue 3: On I March 20X3, CI declared a 10 stock dividend. The purpose of this was to appease the shareholders while they wait for a return on their investments. The stock dividend has yet to be issued Issue: In an effort to further market Check Me Out and create an additional revenue stream, CI developed an app for mobile phones during the first quarter of 20X3. This app is called Check Me Out Mobile. The most unique feature of this app is that it allows shoppers to virtually try on clothing while in a physical storefront. The app can display virtual images of the shopper wearing items on display in the store. The app can combine items from the store, other stores where the shopper has uploaded data, and the shopper's own closet. The app will be promoted with the slogan "It's like having a stylist living in your phone." because of the variety of outfit alternatives that can be displayed A retailer does not have to be a Check Me Our client for shoppers to use the app in their store. However, functionality is greatly enhanced when the retailer is a client. For example, a retailer that is Check Me Out enabled will have codes displayed on clothing tags that can be scanned and quickly "tried on" by customers. If a retailer is not Check Me Our enabled, a shopper will have to take a picture of the clothing item to enter the item in their virtual wardrobe. Costs of $150,000 were incurred to create the app. The breakdown of these costs, which are reported under intangible assets on CI's balance sheet, is as follows: Market research $25,000 Design of prototype $35,000 Testing and refinement $40,000 Advertising $50,000 The app will go on sale on 1 April 20X3. Based on market research conducted, and th that has been generated through various social media marketing campaigns, it is en product will be strong. CI forecasts sales of approximately $100,000 during to speculate what will happen. CI suspects that the long-term success of the app is depe retailers continue to adopt Check Me Out. Required: on market research conducted, and the positive word-of-mou media marketing campaigns, it is expected that initial sales of th ats sales of approximately $100.000 during fiscal 20X3. Beyond that, it is difficu pects that the long-term success of the app is dependent on whether clothir Prepare the report requested