Abbotsford Tile Ltd. (ATL) is a wholesaler of high quality glass, ceramic and marble tiles. In November 2019 the owner of ATL agreed to sell the company to Barrie Tile Inc. (BTI) another tile wholesaler. Each company is owned and operated by a single individual who originally founded his company. The owner of ATL decided to sell his business because he was beginning to get too old to run the store. The owner of BTI wants to purchase ATL to expand the size of his business. The two men agreed over lunch that BTI would buy ATL for an amount equal to five times ATLs net income before tax for the year ended December 31, 2019. The deal is to be finalized on March 1, 2020. Closure of the deal requires that BTI approve of the financial statements prepared by ATL. The two men agreed that any disputes regarding the financial statements would be settled by negotiations and, if necessary, by arbitration by an independent third party.

It is now January 15, 2020. You have been called by BTIs owner to help him understand and assess a number of transactions that are reported in ATLs December 31, 2019 financial statements. The owner of BTI explained that he does not have much experience working with financial statements but based on his examination, along with information obtained from other sources, he is concerned about a number of transactions reported in ATLs statements. The owner has asked you for a detailed report explaining the impact of each event on the purchase price of ATL and your assessment of each of the issues. BTIs owner said that he would like a full explanation of the implications of each event, your evaluation of the accounting used by ATL, and your supported recommendation of the appropriate treatment for each event. Your explanations are important because they will be used in negotiations with the owner of ATL and, if necessary, presented to the arbitrator.

The owner of BTI provided you with the following information about the events that are of concern to him:

1. GTL paid a $60,000 non-refundable fee on October 15, 2019 to their delivery company as a prepayment for services from November 1 2019 November 1, 2020. The contract between the delivery company and GTL is for 2 years. The delivery company charges GTL $20,000 each month, less $5,000 which has been paid up front as the deposit. The $60,000 has been recorded as a prepaid asset. The delivery expense for the year ended December 31, 2019 totaled $30,000.

2. In August 2019, ATL entered into a long term contract with another tile retailer, Great Tile Ltd (GTL). As part of the agreement, GTL agreed to order products from ATL on a monthly basis. In November 2019 GTL placed a large tile order that will be delivered evenly over a 5- month period. The order totaled $350,000, and GTL paid an upfront non-refundable deposit of $150,000. The fee was recorded as revenue. The first order, with $70,000 worth of goods was shipped to GTL on November 20, 2019. The second order was scheduled to ship on December 20, however, due to the busy holiday season and staffing issues, GTL requested that the order be held at ATLs facility until after the winter break. Since the shipment was ready to go, ATL placed the tiles in a separate part of their facility. ATL recognized revenue for both the November and December orders in 2019, totaling $140,000.

3. In mid-2016 ATL signed a contract to be an exclusive supplier of marble to a commercial builder. The tiles require a specific design, and have to be cut according to the specifics of the builder. The contract was for an initial four-year period, with another four-year renewals possible at the option of the commercial builder. ATL was assured at the time of signing the initial agreement that a renewal was virtually certain. ATL spent $60,000 for certain specialized equipment it needed to cut the tiles to the builders specification. That equipment has a useful life of 12 to 15 years but ATLs owner decided to amortize it over 8 years (the initial contract plus one renewal period). The equipment has little use beyond the purpose required for the contract with the builder. In November 2019 ATL learned that the contract will not be renewed when it expires in mid 2020. The December 31, 2019 financial statements make no mention of the loss of the contract and there is no indication in any change in the accounting for the equipment.