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Question: VIP MOTION VIP Motion is a producer and distributor of motion picture films. It specializes in ac...

VIP MOTION

VIP Motion is a producer and distributor of motion picture films. It specializes in action adventure films popular with males, mostly in the teen and young adult market. While it has only been in business for 7 years, it has produced several moneymaking hits as well as many more minor "B" films that are shown on cable networks and through video rental stores.

VIP Motion has recently completed the production of five new films. This set of five films contains onefilm (“Super Fighters”) that marketing research indicates will be a top box office hit. The other four (SF II, SF III, SF IV, SF V) are "filler" films that will be bundled with the hit and licensed to theatres for exhibition. To receive access to the hit, theatres must agree to show all films a minimum number of times.

In July 2006, VIP Motion entered into an exclusive contract with PlexMedia Theatres, Inc. (PlexMedia), a large theatre chain with approximately 475 theatres across the United States. This contract provided in part as follows:

Agreement: PlexMedia is granted the right, license, and permission to display the five films listed herein during the contract period. In consideration of this contract, VIP Motion will receive:

1. $5,000,000, payable $2,500,000 upon contract signature and $2,500,000 on September 1, 2006.

2. $500 for each film showing in each location.

Contract period: The contract period shall be the six months commencing on September 1, 2006.

Limitation on screenings: PlexMedia agrees to show Super Fighters no more than 42 times per theater and the four accompanying films (SF II, SF III, SF IV and SF V) no fewer than 18 times each per theater.

Exclusivity: PlexMedia shall have exclusive screening rights during the contract period. VIP Motion acknowledges that an integral inducement in consideration of the contract is PlexMedia’s interest in beingthe sole source, without competition from other theaters in the market, during the contract period.

At the signing of the contract, PlexMedia paid $2,500,000 of the $5,000,000.

PlexMedia sent checks to VIP Motion for $2,500,000 on September 1,2006, and $5,462,500 on January 20, 2007, along with an audited statement detailing the number of showings as of December 31, 2006. The following is a summary of that information:

In March 2007, VIP Motion received a demand notice from PlexMedia that all monies previously paid were to be returned or they would file a lawsuit. In their letter, they enclosed a newspaper clipping from a movie theatre in Toronto, Canada that was advertising the set of five films for showing the second week of February 2007.

For the year ended 12/31/2006, prepare a schedule that shows the cash flows

received from PlexMedia from the contract.

I am a bit confused if it was 2.5 m or 5m. Since the 2.5 was still payable.

Answer 1

For the year ended 12/31/2006, the cash flows received from PlexMedia from the contract will be:-

At the signing of the contract = $2,500,000

Cheque received from PlexMedia on Sep'1, 2006 = $2,500,000

Total Cashflows at the year ended 12/31/2006 will be = $5,000,000

But the cashflows i.e the cheque received on January 20, 2007, of amount $5,462,500 was also earned/accrued during 2006 but it was received in Jan'2007. So if cashflows received are to be considered AT 31st Dec 2006 will be $5,000,000 but if it FOR the year 2006 it will be aggregate of all the earnings (i.e. $5,000,000+ $5,462,500) i.e $10,462,500.