Crowdfunding at the Brooklyn Warehouse
(4 pages of text)
The Brooklyn Warehouse, a popular restaurant in Halifax, Nova Scotia, is cramped for space because of its popularity within its neighbourhood and as a tourist destination in the city. The restaurant is a private company with two shareholders, one of whom is not involved in operations. Because of the economic downturn, the risky nature of the business and the fact that it has been open only four years, the owners are having trouble securing financing for their expansion plans from their bank and other conventional lenders. However, while negotiating a renewal of their lease in late 2011, their landlord offered to pay for half the cost of building a patio to increase the size of the restaurant. To raise the other half, the owners turn to crowdfunding as a method of raising capital through social media by tapping into their community of friends, family and loyal customers. In return for their donation, which may vary from $100 to $2,500, sponsors are offered various packages, including free meals, a company T-shirt and their name listed on a wall of honour. However, little is known about the appropriate accounting or tax treatment for money raised in this manner. The owners had heard horror stories about businesses that used innovative ideas to raise funds only to have fines and penalties levied by government agencies for income tax and sales tax or even by the Securities Commission for improper accounting. The owners turn to their accountant for advice.
This case is applicable in intermediate financial accounting courses that address issues of revenue recognition, liabilities, contributed surplus, leasehold improvements, government contributions (as an analogous type of transaction) and related income taxes and goods and services tax or harmonized sales tax issues; an upper year accounting seminar course that applies basic principles to non-standard situations to justify accounting recommendations to clients or audit supervisors; or an income tax course, examining application of tax law in an unfamiliar situation. Its objectives are:
- To provide students with an opportunity to assess accounting transactions where the appropriate accounting is not obvious, requiring them to look through the clear legal form to the substance of the underlying transactions.
- To provide an opportunity for students to become familiar with Part II of the Canadian Institute of Chartered Accountants Handbook.
- To provide an opportunity for students to relate their basic knowledge of taxes to an unusual business transaction.
Accommodation & Food Services
Canada, Small, 2012
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