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Question Cambridge Publishing Limited ( Cambridge ) is a medium - sized, privately owned Canadian company that holds exclusive Canadian distribution rights for the publications

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Cambridge Publishing Limited (Cambridge) is a medium-sized, privately owned Canadian company that holds exclusive Canadian distribution rights for the publications of Taylor Daily Corporation (TDC). Oxford Communications Ltd.(Oxford), an unrelated privately owned Canadian company, held similar distribution rights for the publications of Wiley Astronomical Limited (WAL).
Cambridge specializes in producing high-quality books on astronomy, stars, and planetary science. Founded many years ago, the company has established itself as a leading publisher in the field of space science literature, catering to both academic and general audiences. Cambridge is known for its vibrant scientific community and proximity to several renowned research institutions. Over the years, Cambridge has published a wide array of titles, including textbooks for university courses, comprehensive guides for amateur astronomers, and popular science books for general readers. Their catalog features works by some of the most respected names in astronomy and planetary science, as well as emerging voices in the field. The company is known for its meticulous editorial standards and the ability to present complex scientific concepts in an accessible and engaging manner.
TDC and WAL were unrelated U.S. publishers of magazines and books. WAL went into receivership in early Year 3 and was then purchased by TDC. TDC did not want the exclusive rights for its publications split between two companies, and it did not believe that either Cambridge or Oxford, individually, could adequately distribute its products in Canada. In order to retain the distribution rights that otherwise would have been lost at the expiry of the contracts, Oxford merged with Cambridge on July 31, Year 3. Details regarding the merger and the restructuring that followed soon after the merger are provided in Exhibit I.
In September Year 3, the directors of Cambridge requested that your firm let its name be offered as auditor for the year ending February 28, Year 4. Your firm accepted the request. In prior years, two other firms audited Cambridge and Oxford. It is now October Year 3, and your firm was appointed as auditors at a shareholders meeting. Subsequent to your appointment as auditors, the president requested a report on the following matters:
1. The accounting treatment that should be given to the merger and to the transactions that have arisen since February 28, Year 3, together with full reasons for all recommendations.
2. Any other issues (other than tax and assurance) that the president should be aware of, arising from the merger, or from recent events, together with recommendations.
The partner in charge of the engagement asked you, CPA, a manager in the firm, to prepare the draft report. You and your staff have gathered information on Cambridge. This information is contained in Exhibit II.
EXHIBIT I
INFORMATION ON CAMBRIDGE
1. The merger of Cambridge and Oxford took effect on July 31, Year 3, and involved these steps:
a. Cambridge issued voting shares of the company to the shareholders of Oxford in exchange for all the outstanding shares of Oxford. Cambridge's original shareholders now own 75% of Cambridge's voting shares.
b. Oxford was wound up.
c. Oxford's offices were closed, and its operations were moved to Cambridge's offices. Oxford had a ten-year lease with four years remaining. All warehouses remained in operation.
d. Several employees were terminated (and given two to six months' salary) or offered early retirement packages.
2. Cambridge retained the same year-end of February 28.
3. After the merger, Cambridge signed new exclusive distribution contracts with TDC and its wholly owned subsidiary, WAL. This gave Cambridge all the rights that had previously been assigned to Cambridge or to the former Oxford. The rights are for five years but are renewable for another five at the option of Cambridge. These rights include distribution of magazines, books, and videos that accompany books. TDC sells to Cambridge at a special discount that precludes Cambridge from returning any merchandise.
4. Before the merger Oxford had been in financial difficulty, incurring large losses over the past few years. During the merger negotiations Oxford and Cambridge approached Oxford's creditors with a plan to restructure Oxford's debt. In September Year 3, Cambridge had been able to finalize the restructuring of some of the debts of the former Oxford as follows:
a. A trade account of US$320,000 due to TDC was converted into a two-year note payable, due in September Year 5. The note is non-interest-bearing and unsecured.
b. Loans of $500,000 due to shareholders and accrued interest of $125,000 were converted in September Year 3 into convertible, preferred shares bearing an 8% non-cumulative dividend.
c. One of the major shareholders forgave a loan of $110,000 in September, Year 3.
d. Creditors who were owed $200,000 agreed to accept

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