Sports Performance Increased (BPI) Ltd. is a relatively new company that created various sports apps designed for

Fantastic news! We've Found the answer you've been seeking!

Question:

Sports Performance Increased (BPI) Ltd. is a relatively new company that created various sports apps designed for athletes. These apps can be downloaded onto a mobile device and assist users in determining where they can improve their game, whether it is soccer, baseball, hockey, running, or swimming. Users are able to download any desired sports application onto a mobile device for a fee that normally ranges from $7.99 to $9.99. SPI charges a $3.99 monthly fee to continue to provide support, as well as updates and improvements to the app.

The company was established by Jeremy and Josh, one year after they completed a degree in business and statistical math. Jeremy and Josh are excellent programmers, and have been playing various sports and analyzing sports statistics since they were children. After designing a mobile app for an undergraduate course assignment, the two friends decided to start up SPI. The company has been well received by the market, and the apps have been downloaded by over 5 million users across the globe.

The company experienced significant growth in its first five years of operations, and decided to go public. Two analysts are currently following SPI’s shares, which are trading at $13, and are preparing their first recommendation. SPI is scheduled to release its financial results in two weeks during a conference call. Based on the results released by industry competitors, analysts are expecting the company to report revenue of $4.2 million and earnings of $1.5 million in the current year.

You are the senior manager with Clark, Walker and Wilson, LLP, the auditors of SPI. Recently, you met with Jeremy and Josh to discuss the following transactions that took place during the year:

SPI entered into an agreement with Play-it-Well Sports (PWS). The terms of the agreement required SPI to provide advertising to PWS in exchange for PWS advertising the apps at their location in Waterloo. SPI does not normally sell advertising space in its apps, and likely would not have been able to sell the advertising for cash. Since this is a new transaction for SPI, the fair value is difficult to estimate, but management believes the advertising is worth $100,000. PWS normally allows various sporting companies to advertise at their location, and estimates the fair value of the advertising they will provide is $150,000. It is unlikely that SPI management would have paid cash for the advertising received. The transaction has been recorded as a credit to revenue and a debit to advertising expense for $150,000.

The company recently joined together with another programmer, Kendal, who had designed an app to help golfers. SPI agreed to carry the app and golfers can downloaded the app for $4.99 off SPI’s website. Kendal had set the price of $4.99 and SPI gives $3.99 to Kendal, keep $1. Kendal has taken on the responsibility of customer service with any issues customers encounter. During the year, 250,000 games were downloaded, resulting in SPI recording $1,247,500 in revenue and $997,500 in cost of goods sold.

Half way through the year, SPI began selling 2-year, non-refundable memberships. The memberships are sold for $100 and allow users to download any one sports app and provide service, with updates and improvements, for a full two year period. During the year, 3,000 memberships were sold. Accordingly, members can download up to a maximum of 3,000 individual sports apps under the membership. Management recorded revenue of $300,000 during the current year as SPI has no further work required to service the memberships.

During the year, the company purchased the rights to develop an app based on the quarterback winning the Superbowl in 2020. SPI paid $175,000 for this exclusive right, and incurred an additional $275,000 in programming costs to create the app. SPI capitalized $450,000 as an intangible asset. The following are the expected downloads for the game, which will be sold for $4.99.

Probability Year 1 Year 2 Year 3

Optimistic 15% 120,000 100,000 75,000

Average 65% 90,000 50,000 30,000

Pessimistic 20% 60,000 20,000 10,000

Two years ago, SPI purchased 10-year bonds of another public company for $350,000. The bonds were classified as amortized cost as management had determined to keep the bonds until maturity. During the current year, the bonds increased in value by $40,000 as central banks began to lower interest rates. At the beginning of the year, management reclassified the bonds to FVTPL as the company plans on selling the bonds in five years.

At the beginning of the year, SPI issued 50,000 redeemable preferred shares to the public for $5 each. The preferred shares have a dividend yield of 5%. The preferred shares must be redeemed if the common share price exceeds $20 per share. Dividends of $25,000 were declared and paid during the year.

During the year, SPI was named in a lawsuit by one its previous employees. The Company’s lawyers believe that there is a 50% chance that the case will be settled with no damages to be paid by SPI. However, there is a chance that the company may have to pay between $50,000 and $100,000 in damages. As of the year end, both the $50,000 and $100,000 amount are equally likely (50% each).

Draft financial statements reveal revenue and earnings of $4,325,000 and $1,550,000, respectively. Management displayed their excitement for their ability to meet analysts’ revenue and earnings expectations. The partner has asked you to prepare a memo for the audit file that discusses the appropriate accounting treatment of the above-noted transactions. The memo will be used as part of the audit planning process.

Required: Prepare the memo.