It is September 15, Year 8. The partner has called you, CPA, into his office to discuss a special engagement related to a purchase agreement. John Toffler, a successful entrepreneur with several different businesses in the automotive sector, is finalizing the acquisition of Super Sports Limited (SSL). The seller, Carl Thomas, founded SSL over 20 years ago, and has decided to retire and sell his business. He has agreed to manage the business until the shares are transferred.
SSL, a wholesale distributor of sports equipment and related products, is very profitable. The company originally sold summer sports items, such as jet skis and canoes, and recently acquired a wholesaler of winter sports items such as snowmobiles. SSL has loyal customers and good relationships with its suppliers.
Excerpts from the purchase agreement are provided in Exhibit II. The purchase price for the SSL shares is the carrying amount of net assets, according to the approved audited Financial Statements as at August 10, Year 8, plus any increase in the fair value of the land and building. See Exhibit III for excerpts from the August 10, Year 8, statements submitted to Toffler for his approval.
Toffler asked Jill Savage, who works for one of his companies, to review SSL's financial statements and the audit Working Papers provided by SSL's auditor. Jill raised several concerns as part of her review (see Exhibit IV). In the spirit of fairness, Thomas and Toffler have requested your firm's views on the accounting issues noted by Jill before continuing with the approval of the financial statements as per clause 29.1. The partner has asked you to draft a memo to his attention, supporting your views.