You have just met a new client, Darth Garbinsky, who has come to you for some accounting advice.
€œThe thing you have to understand, David, 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.
€œTake my current project, €˜Penguins in Paradise.' You only need to look at the cash inflows (Exhibit A) 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 Penguins in Paradise Limited Partnership (PIP). They put up their money to buy a percentage of the future profits of the play.
"Some investors do not want to invest the amount required for a partnership unit. So, for them, we structure the deal a little differently. Instead of buying a unit in the partnership, they buy a right to a royalty€”a percentage of future operating profits (i.e., gross revenue less true operating expenses). In this way, these investors get an interest in the play without being in the partnership. Since they do not have a vote at the partnership meetings, they are more concerned about their risks.
€œFunding the play is not that easy. 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 theatre-goers this year for next year€™s performance. These amounts are non-refundable, and the great thing is that the buyers still have to pay full price for the tickets when they buy them.
€œConsider 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 up front when we needed it.
€œThe 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% per year plus 1% of the gross revenue of the play, instead of the usual 20% interest a year. Even my fee for putting the deal together was taken as a percentage of operating profits, so just about everybody has a strong interest in the play€™s performance.
€œBecause of these various interests in PIP, I will require audited financial statements to determine how much is owing to each party.€
Required:
Prepare a memo for your files summarizing the financial accounting issues raised in your conversation with Darth Garbinsky.

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Exhibit A Cash fows for Penguins in Paradise Penguins in Paradise (A Limited Partnership) Summary of Cash Flows For the period ended December 31, 2011 (in S000's) Cash inflows Investor contributions to limited partnership Sale of royalty rights Bank loan Sale of movie rights Government grants Reservation fees $5,000 1,000 2,000 500 50 20 8,570 Cash outflows Salaries & fees Costumes & sets Miscellaneous costs 3,500 1,000 1,250 5,750 $2.820 Net cash flow