It is January 20, Year 13. Mr. Neely, a partner in your office, wants to see you,

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It is January 20, Year 13. Mr. Neely, a partner in your office, wants to see you, CPA, about Bruin Car Parts Inc. (BCP), a client requiring assistance. BCP prepares its financial statements in accordance with ASPE. Richard (Rick) Bergeron, Lyle Chara, and Jean Perron each own 100 common shares of BCP. Jean wants BCP to buy him out. You made some notes on BCP during your discussion with Mr. Neely (Exhibit I).

Mr. Neely forwarded an email from Rick (Exhibit II) to you, along with excerpts from the Signed Shareholders’ Agreement (SSA) (Exhibit III), the draft financial statements for BCP for the year ended November 30, Year 12 (Exhibit IV), and some additional information regarding the draft financial statements (Exhibit V).

Mr. Neely tells you, “CPA, we need to establish a buyout value. Our valuation must take into account any accounting adjustments required to comply with the SSA requirements. Please also consider any other issues that may be relevant to the other shareholders.”

Exhibit I V

BCP was founded 30 years ago. It manufactures car parts for the North American automotive industry. All sales are made to Canadian-based companies.

All three shareholders have known each other for over 35 years and have different roles within BCP. Rick handles the financial and administrative duties, Lyle is in charge of product design and testing, and Jean is in charge of sales.

BCP’s corporate tax rate is the small business rate of 12% for active business income. BCP applies the taxes payable method for accounting purposes. BCP incurred operating losses in the last few years and as a result has accumulated non-capital losses totalling $240,000, which can be applied against taxable income and thereby save taxes in future years.

BCP does research and development (R&D) every five years, on average. When it does, it is able to claim a 35% investment tax credit on its eligible R&D costs. 

Jean Perron told us on January 12 that he wants to be bought out of BCP. This request has shocked Lyle and me. He said that BCP must buy him out, as per the SSA. I knew Jean was having personal difficulties after his divorce, and he took time off, but he seemed better lately. He started asking for a repayment of his shareholder loan a few months ago to help with his cash flow, but we could not afford it. We were planning to repay him soon, since Year 12 was our best year in the past five years.

We need you to determine the impact of the buyout on BCP. I pulled out the SSA from our archived corporate files. It took me a while to find it, and I barely remembered what it said.


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Modern Advanced Accounting In Canada

ISBN: 9781259654695

9th Edition

Authors: Hilton Murray, Herauf Darrell

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