The CEO of MV-Link Productions has hired your consulting firm to produce a report on this possible breach of contract case, including recommendations. Use the report writing guide from the course website. In your analysis of this case include answers to the following questions:
Q. 1. Did MV-Link breach the contract? Specifically discuss whether the showing by a competitor movie chain in Toronto constituted a violation of the MV-Link/PACE agreement.
Q. 2. Assuming the contract is valid, prepare the following financial analyses:
a. Prepare a budget of expected minimum revenues under the contract. Show the sources of revenues from the set of five films and the fee.
b. What are the general revenue recognition criteria established under Generally Accepted Accounting Principles (GAAP)
c. How would you apply the GAAP criteria for revenue recognition to account for the revenues under this contract? Explain your logic for both realizable and earned.
d. Using the logic you developed in part c, calculate the revenue that MV-Link Productions should report for the set of five films for the year ended 12/31/2006.
e. For the year ended 12/31/2006, prepare a schedule that shows the cash flows received from PACE from the contract.
f. Why do cash flows and revenues recognized differ, if they differ under your calculations?
Note: To the extent that you may recognize any antitrust issues (which we would not expect) please ignore them for purposes of this analysis.
In preparing your report remember to review LDC financial accounting concept 5 (cash flow vs. GAAP income), financial accounting concept 8 (understanding the timing of revenue recognition), management accounting concept 5 (understanding how to budget revenue), and business law concept 1 (offer and acceptance of contracts; enforcement of contracts: interpreting the parties’ intent).
