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Mapping Shoe Company developed a patent for sneakers with GPS in the toe that the wearer can use to navigate. To manufacture the sneakers, Mapping wants to purchase the software for the device from Garmin. Two months after the patent is approved, Mapping sells Garmin $5 million in preferred shares, along with representation on the Board of Directors of Mapping. Additionally, Mapping established a contingent redemption right on the preferred shares. If Mapping does not have earnings of $1 billion in the 5th year after the patent is approved, the preferred shares will be redeemed for 10% over the par value on that date.

A few months later, Mapping issues $20 million in common stock through an IPO.

A. Using the FASB Codification, what are the requirements to disclose within the financial statements the pertinent rights and privileges of the two securities that Mapping issued? Be sure to cut and paste the applicable section, and explain how the Codification applies in your answer.

B. How should Mapping account for the preferred shares upon issuance? Should Mapping consider the preferred stock to be classified as equity, liabilities or in the mezzanine? Use the FASB Codification to support your answer. Be sure to cut and paste the applicable section, and explain how the Codification applies in your answer.

C. In the first year of operations, Mapping Shoe had a substantial net loss. In year 2, Mapping reports income of $25 million when the sneaker map adds a color display. In years 3 and 4, Mapping manages to increase income about the $50 million mark in each year. In year 4, Garmin adds a waze feature to the map. While executives at Mapping hope to reach its $1 billion goal by year 5, Garmin is unsure that earnings will double even with this new feature. What, if anything should Mapping now do to account for the preferred shares? Use the FASB Codification to support your answer. Be sure to cut and paste the applicable section, and explain how the Codification applies in your answer.

D. In year 2, when Mapping reported a profit, management decides to issue a small stock dividend of 10% of the outstanding common shares. Because the companys accountants recently graduated from school, they are uncertain what value to use for the stock dividend. Using the FASB Codification, find the requirement about how to account for a small stock dividend. Be sure to cut and paste the applicable section, and explain how the Codification applies in your answer.

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