Better World Storage Corp oration from that meeting (Exhibit IV). They should all be in your inbox by now. Better World Storage Corporation You are an accountant working at Robi & Co. George Maranzan, a partner in your rm, leaves you the following ' .- voicemail message: \"The scheduling manager tells me you have some time available. We have recently been advised that management of Better World Storage Corporation (BWSC) has received an offer from Ventura Capital Partners to sell 100% of all issued and outstanding common shares, 1 have a meeting with management in two weeks regarding this issue, and I haven't had much time to think about this engagement. I have prepared some background information on the company for you to review, including background informa- tion on the client (Exhibit 1), the company's most recent internal nancial statements (Exhibit 11), and the proposed share purchase agreement (Exhibit 1H). I also met with BWSC management earlier this month and made some notes Can you please prepare a report that I can use for the upcoming meeting? I am glad that you have some time available!" Required Pre pare the report for George. Background Information Better World Storage Corporation (BWSC) duplicates, DVDs, MPSS, and all forms of electronic les from master copies provided by its clients. The company started operations in 2000 in the basement of the home of partowner, Samantha Arthurs, Sales increased quickly, and within one year of starting operations the company moved into a rented space in downtown Toronto. The mar- ket that BWSC 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. Samantha 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 Saman tha's shares. Grant is a good administrator and handles the accounting functions for the company. Samantha's skills are mainly in sales. Ashley looks after the production end and stays abreast of changes in technology. BWSC has an October 31 scal year end. INTERMEDIATE ACCOUNTING II CASES M Internal Financial Statements Statement of Financial Position As at October 31 (unaudited) 2020 2019 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 asset (note 2) 35,000 35,000 Long-term note receivable 20,000 0 $1,295,075 $1,150,680 Liabilities and shareholders' equity Current Accounts payable $ 158,318 $ 130,176 Bank loancurrent portion 41,998 72,000 Income taxes payable 44,609 92,720r 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 0 Retained earnings 931,516 703,950 956,716 725,150 $1,295,075 $1,150,880 Better World Storage Corporation m Internal Financial Statements (Continued) 7 Statement of Income For the years ended October 31 (unaudited) 2020 2019 Sales $2,531,760 $2,221,720 Cost of sales Opening inventory 124,400 26,860 Purchases materia|s 1,018,972 959,138 wages 289,663 219,416 Total 1,433,035 1,205,414 Closing inventory (86,300) (124,400) 1,346,235 1,081 ,01 4 Gross prot $1,185,525 $1,140,706 Expenses Commissions $199,372 $ 174,957 Depreciation 127,684 104,796 Management 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 0 Telephone 13,458 10,510 Insurance 10,864 10,214 Legal and accounting 8,083 3,414 Lease expense 18,143 0 $859,519 $ 786,688 Operating income 326,006 354,018 Gain on sale of equipment 4,560 0 Income before taxes 330,566 354,018 Provision for income taxes 99,000 1 12,000 Net income 231,566 242,018 Opening balanceretained earnings 703,950 465,932 Dividend on preferred shares (4,000) (4,000) Closing balanceretained earnings $ 931,516 $ 703,950 L J INTERMEDIATE ACCOUNTING II CASES M Internal Financial Statements (Continued) 1 Notes to the Financial Statements 1. Capital assets 2020 2019 Accumulated Net Book Net Book Cost Depreciation Value Value Furniture and xtures $ 23,434 $ 12,418 $ 11,016 $ 13,770 Computer equipment 50,842 12,835 38,007 18,421 Leasehold improvements 19,404 19,404 0 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 asset A future tax asset has been recorded for noncapital losses carryforward. The losses were incurred during a bad year in scal 2018. BWSC expects strong future prots to be able to generate taxable income to fully utilize the tax losses. The owners decided not to use the tax losses in the 2020 or 2019 scal years because they expect their marginal tax rate to increase signicantly in the near future due to signicant 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 equipment. Principal repayments on the October 31: 2021 2022 2023 2024 assignment of book debts, and chattel mortgages on duplication small business loan are due as follows during the years ended $41,998 20,034 1 1,700 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. L Share Purchase Agreement Purchase Price Calculation The nal purchase price is to be determined based on an adjusted book value approach, whereby all assets and liabilities are adjusted to their fair values to determine the fair value of the equity. In addition, a premium for goodwill will be calculated based on a mul- tiple of net income for the most recent scal year. Therefore, the purchase price is calculated as follows: - Purchase Price = Adjusted Equity Value + (Net Income x Earnings Multiple) Earnings Multiple A goodwill multiple of between 1 and 2 is common for similar companies. Net Income Net income must be determined based on generally accepted accounting principles (IFRS). Adjusted B ook Value All assets, liabilities, and equities must be recognized and measured in accordance with generally accepted accounting principles (IFRS). J Better World Storage Corporation m Notes From George's Meeting with Grant Macarthur New lease agreement BWSC signed an agreement on November 1, 2019, to lease equip- ment from Sultan Leasing. The following information relates to the agreement: 1. The term of the noncancellable lease is ve years, at which time the asset is expected to have a residual value of $7,000, which is not guaranteed. 2. The asset's fair value, at November 1, 2019, is $80,000, with an economic life of seven years. 3. The asset will revert to Sultan at the end of the lease term, at which time the asset is expected to have a residual value of $7,000, which is not guaranteed. 4. Sultan leasing assumes direct responsibility for the executory costs, 5. The agreement requires equal annual rental payments of $18,143, beginning on November 1, 2019. 6. The lessor's implicit rate is 10% and is known to BWSC. Grant has recorded this as an operating lease and expensed the annual payment during the scal year. Provision for income taxes The provision for income taxes included in the nancial statements is recorded based on the taxes payable in the current period (that is, the amount payable based on taxable income). Management has prepared the calculation by focusing only on the undcpreciated capital cost (UCC) and depreciation difference because they are unsure of any other differences. A review of Schedule 8 of the Corporate T2 reveals UCC bal ances of the following: Cost UCC Furniture and fixtures $23,434 $10,518 Computer equipment 50,842 6,835 Leasehold improvements 19,404 19,404 Vehicle 40,352 29,985 Production equipment 931,074 289,567 The total capital cost allowance taken in 2020 was $140,545. The average tax rate for BWSC is 31.16% on the current year's income. 10 Preferred shares On November 1, 2019, BWSC issued 2,000 redeemable and retract- able preferred shares at a value of $10 per share. The shares are redeemable by BWSC at any time after January 2021. The shares are retractable for the original $10 per share at the discretion of the holder at any time up to January 2021, after which the retractable feature expires. The preferred shares require the payment of a mandatory $2 per share during the retraction period, after which the dividends become noncumulative and are paid at the discretion of the board only. Long-term note receivable On July 1, 2020, BWSC provided certain services to a preferred customer in exchange for a long-term note receivable. BWSC provided its services in exchange for ve payments of $4,000. BWSC provided its preferred customer with this offer to help stim ulate the sale given the recent nancial crisis. The rst payment is due July 1, 2021. Loyalty program points During the most recent board meeting, it was decided that BWSC will begin offering points under a loyalty program. BWSC will pro- vide its customers with 1 point for every $100 spent. The points can then be redeemed for a discount on future services. A total of 100 points will result in a $5 00 discount. Postretirement benets BWSC has just implemented and sponsored a dened benet plan for its employees in scal 2020. No past service benets have been granted. The following additional information was obtained from an actu arial report that has been prepared as at the year end: Service cost for 2020: $95,000 Discount or settlement rate: 8% Actual return on plan assets for 2020: 8% Contribution (plan funding) in 2020: $87,000 Expected rate of return for 2020: 8% The initial contribution of $87,000 was made on August 1, 2020, Currently, BWSC has expensed the contribution as part of the management salaries and benets (on the income statement)