Daphne$$s Catering Ltd$.($DCL$)$ provides catering services to people living in Durham region and the eastern part of Metro Toronto. The company is owned and operated by Daphne Flatt, who founded the business in $1998.$ DCL can provide meals for groups as small as two and as large as $500.$ DCL operates out of its state$-$of$-$the$-$art commercial kitchen in Ajax. The meals are prepared in the kitchen and delivered to the site of the event. DCL$$s kitchen is adjacent to a banquet hall it also owns. DCL also generates revenue by renting out the banquet hall for functions and catering them.

The company has been very successful over the years and Daphne has made a lot of money. Recently, Daphne decided that she would like to slow down the pace of her life and has decided to sell her shares $($she owns $100\%$ of the company$).$ Joe Insalacco has expressed interest in buying DCL and he has been in negotiations with Daphne for several months. The parties have agreed that Joe will purchase Daphne$$s shares for $$550,000$ plus five times average net income for the last two fiscal years.

Two days ago, Daphne couriered DCL$$s September $30,2020$ year$-$end financial statements to Joe for his review. Joe is not very knowledgeable about accounting matters so he has engaged you to examine the statements and raise any issues of concern as they pertain to his agreement to buy DCL$.$ You review the financial statements, have a conversation with Joe, and a brief chat with Daphne, and discover the following:

DCL$$s net income for the years ended September $30,2020$ and $2019,$ respectively, was $$275,000$ and $$160,000.$

In October $2019,$ DCL printed several thousand brochures for distribution to businesses and homes in certain areas in Durham and Toronto. The brochures were designed to promote DCL$$s services over the $2019$ Christmas and New Year$$s period. The brochures were specially designed to emphasize the $2019$ holiday and appropriate holiday meals. Because of bad weather and problems with the distributor, only about $40\%$ of the brochures were distributed. The brochures remain safely stored at the DCL kitchen. A prepaid expense for $$19,000$ is reported on the September $30$ balance sheet for the undistributed brochures.

A large corporate function scheduled for September $18,2020$ had to be cancelled on short notice by the customer. The customer asked whether the event could be rescheduled for October $2,2020.$ DCL$$s banquet hall was available on October $2$ and DCL was happy to reschedule. On August $31,$ the customer paid $$45,000(75\%$ of the agreed price$)$ as the original contract stipulated. DCL recognized the amount received in August as revenue in its $2020$ fiscal year. The customer paid the remaining $$15,000$ owing on October $4,2020.$ Costs incurred for meals, entertainment, and labour were $$44,000$ and these were expensed at the time of the event.

Each year during the last week of September, DCL has a major program of maintenance on its kitchen and banquet hall. Late September is usually a quiet time and Daphne has found it more efficient to do all the maintenance work at once. The banquet hall is closed for several days and the kitchen can have only limited operations. This year, the maintenance program was delayed into October because of the corporate function held on October $2.$ The cost of the maintenance program in $2020$ was $$18,000.$ In $2019,$ the maintenance program was carried out and completed in late September.

DCL is in the process of developing a line of packaged foods for sale in grocery stores. The idea is to allow customers to bring the taste and convenience of a high$-$quality catered meal to their homes. Over the last $18$ months, DCL has invested $$55,000$ in the development of the product. Daphne is confident that the product will be successfully and profitably brought to grocery stores but she realizes there are significant development, production, and marketing obstacles that will have to be overcome before that occurs. The $$55,000$ is reported on the balance sheet as a product development cost on September $30,2020.$

Joe has asked you to prepare a report discussing issues pertaining to the purchase of DCL$.$ He would like full explanations of your recommendations and the reasoning behind them so that he can have a full understanding when he meets with Daphne. He would also like you to quantify the impact of any adjustments you make on the final selling price of DCL$.$

Required

Prepare the report requested by Joe Insalacco.