1. In a court case, do we still list the users/objectives? Also, who would be a primary user of the financial statements in this case? 2. Since this is a private company, it can use ASPE, however in the case it says it uses its financial statements primarily for tax purposes. Does that mean it follows IFRS?
THE DIVORCE OF JOANNE AND LAWRENCE APPEL Assignment 1 - ACTG 2011 Fall 2014 In November 2017, Joanne and Lawrence Appel decided to divorce after 20 years of marriage. Among the assets owned by the couple is a business, Commercial Printing Limited (Commercial), that they organized together in 2003. The Appels are equal shareholders but Lawrence has never been involved in Commercial; Joanne has always managed the business. The Appels agree that Joanne will purchase the shares of Commercial from Lawrence at fair market value. Since the shares aren't traded on an exchange, no market price is available, so they agree that fair market value will be equal to five times average net income for the past three years, including the fiscal year ending December 31, 2017. Joanne and Lawrence also agree that the accounting policies should be reasonable for determining representative net income for the business. They also recognize that adjustments to the final selling price might be necessary so adjustments to the final selling price can be made to take specific circumstances into consideration. You obtain the following information about Commercial: 1. Commercial produces printed materials and makes copies for customers. 2. Commercial has used its financial statements primarily for tax purposes. The company writes off any expenditures it makes that can be justified for tax purposes, regardless of whether they have any future benefit. Examples of such expenses include a home office for Joanne as well as both Joanne and Lawrence's personal motor vehicle expenses. 3. Most transactions are on a cash basis. Commercial offers credit terms for its larger customers. 4. Commercial has $100,000 in loans from the shareholders. The loans are interest-free. 5. The company owns a small building in the north end of the city. Its offices occupy the ground floor of the building and the rest of the building is leased to tenants. Since the building was acquired, its market value has increased from $2.5 million to $3.0 million. The building is recorded on Commercial's balance sheet at cost less accumulated amortization. 6. The Appels have charged many personal expenses to the business. 7. Joanne Appel took a salary of $200,000 during the year. A manager doing Joanne's work at a competitor's company would be paid about $65,000. 8. During the summer of 2017, Lawrence Appel negotiated a long-term contract with a customer on behalf of Commercial to produce instruction manuals for its products. The contract begins in January 2018. In exchange for lower printing rates, the customer has guaranteed a minimum of $200,000 of work over two years. The customer will pay as the work is done. Any shortfall from the $200,000 will be paid at the end of the contract term. 9. Commercial's printing equipment is old but dependable. The original cost has been amortized to zero several years ago but Joanne has maintained the equipment in terrific shape and doesn't expect that it will need replacing for several more years at least. Required: You have been engaged by Joanne Appel's lawyer to prepare a report that he can use in his negotiations with Lawrence's lawyer. The report should state the accounting policies that should be used for preparing the financial statements that will be used to set the selling price of Commercial, as well as any adjustments that should be made to the final price because of other information and concerns you have. The report should explain your reasoning fully so that Joanne's lawyer can understand your recommendations and be prepared for any alternatives that Lawrence's lawyer might propose. Adapted from: Financial Accounting: A Critical Approach Friedlan, 4e CASES 13-15
