You, the CA, an audit senior at Grey & Co., Chartered Accountants, are in charge of this year’s audit of Plex Fame Corporation (PFC). PFC is a rapidly expanding, diversified, and publicly owned Entertainment Company with operations throughout Canada and the United States. PFC’s operations include movie theatres, live theatre production, and television production. It is June 22, Year 7, the week before PFC’s year-end. You meet with the chief financial officer of PFC to get an update on current developments and learn the following.
PFC 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 PFC in Montreal. This payment represents a penalty for not completing the theatre complex on time. Construction began in June Year 6 and was to have been completed by December Year 6. Instead, the complex was not completed until the end of May Year 7.
PFC’s consolidated income before tax was $147 million for the 11 months ended May 31, Year 7. PFC hopes to maintain its recent trend of reporting a minimum before-tax return on shareholders’ equity of 20%.
When you return to the office, you discuss the aforementioned issues with the partner in charge of the PFC audit. She asks you to prepare a report on the accounting implications of the issues you have identified as a result of your meeting. When the accounting for an individual transaction has not been specified, you should indicate how it should be accounted for and the impact that the accounting would have had on the key metric(s).
Required:
Prepare the report to the partner. Ignore income taxes.