Question details

Intermediate Accounting
$ 40.00

You are an accountant working at Hasfa & Co. George Maranzan, a partner in your firm, leaves you the following voicemail message:

"The scheduling manager tells me you have some time available. We have recently been advised that management of Back-I-Up Corporation (BIUC) has received an offer from Ventura Capital partners to sell 100% of all issued an outstanding common shares. I have a meeting with management in two weeks regarding this issue, and I havent had much time to think about this engagement.

I have prepared some background informationon the company for you to review, including background information on the client (Exhibit 1), the company's most recent internal financial statements (Exhibit11), and the proposed share purchase agreement (Exhibit 111). I have also met with BIUC management earlier this month and made some notes from that meeting (Exhibit 1V). they should all be in your inbox by now.

Can you please prepare a report that I can use for the upcoming meeting?


Required:I am glad that you have some time available!"

Prepare the report for George

Exhibit 1 - Background Information

Back-It-Up Corporation (BIUC) duplicates videotapes, DVD's CD's, and all forms of electronic files from master copies provided by its clients. The company started operations in 2000 in the basement of the home of part-owner, Samantha Arthurs. Sales increased quickly, and within one year of starting operations the company moved into rented space in downtown Toronto.The market that BIUC currently serves is mainly large companies that require training programs, corporate messages, and so on.

The company is owned equally by Samantha Arthurs, Grant MacArthur, and Ashley Carvalho. Samatha started the venture and has always managed the sales function. In order to keep the company growing, she brought in Grant and Ashley as equal shareholders. Grant and Ashley each paid $30,000 for one third of Samantha's shares.

Grant is a good administrator and handles the accounting functions of the company. Samantha's skills are mainly in sales. Ashley looks after the production end and stays abreast of changes in technology.

BIUC has an October 31 fiscal year end.

Exhibit 11 - Internal Financial Statements        
Statement of Financial Position          
As at October 31 (unaudited)     2017   2016
               
Assets              
Current              
Cash         $         151,764   $         160,502
Accounts Receivable       $         334,894   $         411,760
Inventory         $           86,800   $         124,200
Prepaid Insurance       $             4,720   $             2,060
          $         578,178   $         698,522
Capital assets (note 1)       $         661,897   $         417,158
Future Income Tax (note 2)     $           35,000   $           35,000
Long-Term note receivable     $           20,000   $                    -  
          $      1,295,075   $      1,150,680
               
Liabilities and Shareholders' equity          
Current              
Accounts payable       $         158,318   $         130,176
Bank Loan - current portion     $           41,998   $           72,000
Income tax payable       $           44,609   $           92,720
          $         244,925   $         295,096
Long-term bank loan (note 3)     $           35,334   $           77,334
Due to shareholders       $           58,100   $           53,100
Common Shares       $             1,200   $             1,200
Preferred Shares       $           20,000   $           20,000
Contributed surplus       $             4,000   $                    -  
Retained earnings       $         931,516   $         703,950
          $         956,716   $         725,150
          $      1,295,075   $      1,150,880
               
               
Statement of Income            
For the year ended October 31 (unaudited)   2017   2016
               
Sales         $      2,531,760   $      2,221,720
Cost of Sales            
Opening Inventory       $         124,400   $           26,860
Purchases - Materials       $      1,018,972   $         959,138
                  - Wages       $         289,663   $         219,416
Total         $      1,433,035   $      1,205,414
Closing Inventory       $          (86,800)   $       (124,400)
          $      1,346,235   $      1,081,014
          $      1,185,525   $      1,140,706
Expenses              
Commissions       $         199,372   $         174,957
Depreciation       $         127,684   $         104,796
Managaement Salaries and Benefits     $         110,448   $         110,040
Management Fees       $         109,600   $         112,600
Rent         $           75,840   $           74,020
Office and general expenses     $           48,723   $           46,877
Advertising and promotion     $           37,585   $           31,284
Repairs and Maintenance     $           27,173   $           24,686
Automobile and travel       $           26,326   $           22,782
Bad Debt         $           15,596   $           21,188
Interest         $           16,864   $           39,320
Computer system installation     $           13,760   $                    -  
Telephone         $           13,458   $           10,510
Insurance         $           10,864   $           10,214
Legal and Accounting       $             8,083   $             3,414
Lease expense       $           18,143   $                    -  
          $         859,519   $         786,688
Operating Income       $         326,006   $         354,018
Gain on sale of equipment     $             4,560   $                    -  
Income before taxes       $         330,566   $         354,018
Provision for income taxes     $           99,000   $         112,000
Net income         $         231,566   $         242,018
Opening balance - retained earnings     $         703,950   $         465,932
Dividend on preferred shares     $            (4,000)   $            (4,000)
Closing balance - retained earnings     $         931,516   $         703,950
               
Notes to the Financial Statements          
1. Capital Assets            
          2017   2016
      Cost Accumulated Depreciation Net Book Value   Net Book Value
Furniture and fixtures   $       23,434 $       12,418 $           11,016   $           13,770
Computer Equipment   $       50,842 $       12,835 $           38,007   $           18,421
Leasehold Improvements $       19,404 $       19,404 $                    -     $             2,842
Vehicle     $       40,352 $       27,985 $           12,367   $           17,667
Production Equipment   $     931,074 $     330,567 $         600,507   $         364,458
      $ 1,065,106 $     403,209 $         661,897   $         417,158

2. Future Income Tax

A future tax asset has been recorded for non-capital losses carryforward. The losses were incurred during a bad year in fiscal 2015. BIUC expects strong future profits to be able to generate taxable income to fully utilize the tax losses. The owners decided not to use the tax losses in 2017 or 2016 fiscal years because they expect their marginal tax rate to increase significantly in the near future due to significant growth in income.

3. Bank Loan

A small business bank loan and line of credit for $200,000 (presently unused) are secured by a general security agreement, a registered general assignment of book debts, and a chattel mortgages on duplication equipment. Principle repayments on the small business loan are due as follows during the years ended Oct 31:

2018 $      41,998
2019 $      20,034
2020 $      11,700
2021 $        3,600

Interest on the small business bank loan is paid at 12% on the outstanding monthly balances. Interest on the line of credit is calculated at prime plus 1.5% on outstanding monthly balances.

Issues to address:

Identification and Analysis of Issues (80%)

 
 

Issue 1: Accounting for the Lease

 
 

Issue 2: Preferred Shares

 
 

Issue 3: Post-retirement benefits

 
 

Issue 4: Long-term Note Receivable

 
 

Issue 5: Future Tax Liability

 

2.

Recommendation on how to address issues

 
 

a. Provides appropriate recommendation given the case facts and analysis completed

From Accounting, General Accounting Due on: 21 Sep, 2018 12:01:00 Asked on: 18 Sep, 2018 11:17:36
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