Island Zip Incorporated (IZI) is a Prince Edward Island (P.E.I.) company that was incorporated on…

Island Zip Incorporated (IZI) is a Prince Edward Island (P.E.I.) company that was incorporated on October 1, 2020, and will celebrate its first fiscal year end on September 30, 2021. IZI operates a newly constructed adventure course on P.E.I. that includes 3,000 metres of ziplines, swinging bridges, and additional exhilarating obstacles. IZI, which is open to the public from April to September, is owned by a young couple, Kim and John Gamble, who are recent university graduates. In order to make the company a reality, the Gambles were fortunate to receive a grant from the P.E.I. Department of Tourism to assist in the construction of the adventure course, related capital assets, and 2021 operating costs. Although not expected to generate profits immediately, the tourism department believes IZI will stimulate tourist traffic to P.E.I. and is therefore a worthy investment. It will be monitoring attendance to help determine whether IZI is attracting sufficient visitors to justify extending further operating funding in the future. The Gambles were pleased to receive grant funding, especially since the interest rates lenders quoted averaged 12%. As a condition of the grant IZI must obtain a financial statement audit. It is now September 1, 2021. You, CPA, are the senior auditor assigned to the iZi audit engagement for the fiscal year ending September 30, 2021. The partner on the engagement met with the Gambles recently and notes from her meeting are included in Appendix I. She noted that the Gambles are unsure on some of the accounting and she would like you to analyze the financial reporting issues they have outlined. Additionally, the partner has requested an audit planning memo that assesses the risk of material misstatement, and calculates materiality Excerpts from the grant agreement between IZI and the tourism department are included in Appendix II. A breakdown of costs for the construction of the adventure course are included in Appendix III. APPENDIXI NOTES FROM MEETING WITH THE GAMBLES John is forecasting total revenue to be around $200,000 by the time the year is over, and for IZI to show a net loss of $50,000 before considering the grant and amortization. Total assets should be around $1,300,000 including the $1,245,000 of additions (see Appendix III). Although John holds a business degree, he is not well versed in accounting and needs advice on the more complicated aspects of financial reporting. He has made the following decisions in the current year but needs your assistance in determining if they are correct: Adventure course construction costs John reported the $1,245,000 total as property, plant and equipment on the balance sheet. No amortization has been recorded to date, although John has stated that he plans to amortize the $1,245,000 over five years. John needs confirmation from us that capitalizing the full amount and amortizing it over five years is the right accounting treatment. (Appendix III) Government grant John is not sure how to account for the government funding. He has reported both $1 million in capital funding and the $250,000 in operating funding already received as revenue. He needs to know if this is the right accounting treatment. He also wonders if the $1 million received and the $250,000 received should be accounted for differently since these amounts were not for the same type of expenses. Please separately analyze the accounting for both funds received