Namaste Yoga Company

Andrea Burton incorporated Namaste Yoga Company (NYC), which operates a yoga studio founded in Calgary in 2005. She is the companys only shareholder. NYC offers many different varieties of yoga classes, from beginner to advanced, as well as yoga clothing and accessories. Since that time, Andrea has become instrumental in the growth of yoga both on a local and national level, and was even the keynote speaker at the 2017 Canadian Yoga Association Conference in Toronto.

Andrea started NYC with modest aspirations at a time when yoga was relatively unknown. Over the past few years, the popularity of yoga has increased significantly and Andrea consistently found that NYC was unable to keep up with demand. In early 2017, Andrea made the decision that she was going to open a second, much larger, studio in southwest Calgary after finding a perfect space for the studio, complete with offices, retail space and room for four large yoga rooms. This would give the company additional space for her to offer a training program for prospective instructors. She signed a threeyear lease on this space in June 2017, with occupancy commencing on August 1, 2017.

Having successfully expanded the size of her business, Andrea now feels it may be a good time to sell the company, as she has been interested in retiring. She is now negotiating the sale of her shares in the business with a number of local interested parties. Andrea knows that businesses like NYC will usually sell at a price based on a multiple of the companys net income. Because she is selling the business to an employee, she wants to ensure that the price is fair but not too low.

You worked for NYC two summers ago and since Andrea knows that you are now an accounting major at one of the top business schools in the country, she has asked to meet with you. It is now March 2018.

You:	Andrea, how can I help you today?
Andrea:	Well, the time has come for me to step down. I am looking to sell the studios, but want to ensure I sell it for a fair price.
You:	What are your main concerns?
Andrea:	The business has had several transactions that I am unsure of the proper accounting treatment for and I want to ensure my calculation of net income is accurate as I will be selling the business for a 3.0x multiple of EBITDA (net income before interest, income tax expense and depreciation expense). My draft statements currently show the companys net income as $288,000 for the year ending December 31, 2017, including $15,000 of depreciation expense and $2,000 of interest expense.
You:	Not a problem, I will have a look at these issues and provide you with an updated net income

You decide that your answer to Andrea will consist of formal report, presented to Andrea addressing any accounting issues you may have encountered and a recalculation of net income and the purchase price for the companys shares.

1. On July 1, 2016, NYC spent $25,000 installing a ThermaRay Electric Radiant Heating System that would allow Andrea to offer hot yoga classes. She estimated that the system has a five-year useful life and a $1,000 residual value. Andrea has chosen to use the double-declining method of depreciation for the heating system. When the product arrived, Andrea hired an HVAC specialist to install the unit at a cost of $6,000 that her accountant recorded as installation expense.