This case primarily concerns the application of financial reporting standards and current tax law to certain transactions of a company called Advance Game Products, Inc. (AGP). Internal control issues are also presented. Specifically, the case involves issues related to the accounting and tax treatment for two types of sales rebates, licensing arrangements whereby professional athletes permit their likeness to be used in the company's video games, and a contract with another company under which it will be the primary creative force behind the development of certain new games while AGP will take on the primary role of marketing those games. Students are also asked to identify potential concerns over the processing of the rebates and make recommendations on what internal controls the company should implement. The case has a difficulty level of 4, although the assignment could be easily adapted for use in a second Intermediate Accounting course or junior level business tax course. The case is designed require 1 to 4 hours of class time and require 12 to 15 hours of student preparation outside of class if all questions are assigned.
Jamie Jetson, a recent college graduate with an Accounting degree, has been assigned to the Advanced Game Products, Inc. (AGP) client engagement. The company operates in the dynamic video game industry, where creativity is paramount. Jamie's firm has been hired to do the audit and tax work for AGP. There were several big changes at AGP during the year, and Jamie's accounting firm has to determine how to deal with those items. AGP has recently signed contracts with celebrities for the rights to use their likenesses in video games under development. Unfortunately, one of the professional athletes, who already received a large advance, was involved in a big public scandal, so AGP has cancelled the development of his game. Another big change was that the company recently started a sales rebate program for both games sold in stores and games downloadable from the Internet. AGP has also signed a new agreement with another company to help it develop new games to work with new gaming platforms. With these new developments come both opportunities and concerns for AGP.
ADVANCED GAME PRODUCTS, INC.
Jamie Jetson recently graduated from Galáctica State University and landed a job in the Chicago office of a regional public accounting firm. She has been assigned to work on the engagement team for Advanced Game Products, Inc. (AGP). Jamie's firm does both the audit and tax work for AGP. The team has been gearing up for the audit of the 2010 financial statements and the preparation of the 2010 tax returns. Jamie has been asked by the engagement manager to do some research on the proper accounting and tax treatment for transactions that are new to AGP in 2010. The following information has been gathered from the audit planning documents.
Advanced Game Products, Inc. (AGP) designs, produces and distributes video games for electronic platforms, including game consoles (Nintendo Wii, Microsoft Xbox 360, and Playstation 3), handheld game devices, cellular phones, and computers. The company was founded in 1995 by Jackson Packman, who began with one game he designed in the basement of his home. Since then, the company has had one hit game after another, along with many game designs that never came to fruition. Revenues have grown an average of 15 percent per year for the past five years, despite a downturn in the economy. However, the company has had very minimal profits due to high research and development costs combined with short product life cycles. The company now has 1200 employees, but is still privately held, with Mr. Packman retaining 75 percent ownership and five other investors owning the remainder. The company's main headquarters is in Chicago, Illinois. AGP is an accrual-basis taxpayer and is taxed as a corporation.
The company now has hundreds of games in its product mix, and introduced 25 new titles in 2010. …