Universal Comics Limited (Universal) is a publisher of purely Canadian comic books and owns the exclusive rights to all its characters. Universal’s newest character released two years ago, Ridgeback Man, a local private investigator with heightened canine abilities, has been well received by comic book fans in the Toronto region. The current founder and owner Lan Stee has been offered a once in a lifetime opportunity to be the COO, Chief Operation Officer, of DeeCarvel Comics, the world’s largest comic book publisher. As a result, Mr. Stee felt it was time to sell Universal and in late August 2019, reached a tentative sales agreement with Fran Miller, one of Universal’s pioneer creators. This ensured that Universal would continue to prosper as a Canadian company and stay with the people that believed in the company. The agreed final selling price would be 4 times retained earnings at the end of December 31, 2019. A tentative agreement was signed stating the final sales date of April 1, 2020 after all financial statements have been reviewed. In early March Ms. Miller received the 2019 financial statements. Upon her review she was very concerned about how a number of items had been accounted for and wanted to back out of the final deal. To make sure her decision was based on a sound analysis Ms. Miller has hired you to prepare a report on how to account for the issues she is concerned with. Ms. Miller thinks that as a result of these accounting issues she isn’t paying a fair and reasonable price for the company. Ms. Miller would like you to provide clear explanations and support in your analysis so that she will be able to explain her concerns to Mr. Stee.

1. Universal’s December 31, 2019 ending retained earnings was calculated as follows: Opening retained earnings $ 203,000 Add: Net Income $ 65,000 Less: Dividends $ 0 Ending retained earnings $ 268,000

2. In late December 2019 Universal made a large shipment of Ridgeback Man comics to an eastern Canada comic book chain. Universal had been in contract negotiations with the customer for some time and the final agreement was an important step in its planned expansion into eastern Canada. The customer has an excellent credit rating and payment for the shipment was received in full, on time, on January 10, 2020. Because Ridgeback Man primarily solved his cases in the city of Toronto, being able to reach a new fan base in eastern Canada would be critical to taking the comic national and subsequently international. Given the uncertainty of success, Universal offered a full refund any time up to July 30, 2020, to the comic book chain. Universal recognized the revenue for the sale when the comics were shipped, as is its policy. Total revenues realized were $100,000 with a gross margin of $25,000.

3. In 2018 Universal released a new female superhero called Misty Waters with the ability to manipulate water. The comics were not well received and as a result the comic was discontinued. Currently, there are $18,000 remaining in the inventory of the comics that have not been sold since the end of 2018. Mr. Stee believes that in 10 to 15 years these comics will become a collector’s item so he has kept them in inventory. Furthermore, the creators have considered a marriage between Misty Waters with Ridgeback Man which might renew interest in the character. 4. Ms. Miller learned that in January 2020 one of Universal’s investments, Com Co., suffered a catastrophic fire that may put the company out of business. The company had also forgotten to renew its insurance policy. Universal’s management thinks it’s very likely that their investment of $10,000 for 100 shares will have little to no value moving forward. Universal has not adjusted the financial statements for the event but there is a note describing the event and its impact. 5. The company’s flagship store was located in a slower part of the city when it first opened. With the success of Ridgeback Man more and more fans have been making the drive to the store. The first run issue has recently sold at auction for $1,000 which was unheard of for a niche comic. As a result, Mr. Stee felt that the company-owned store and a paved lot would have a longer useful life, resulting in a decrease of depreciation by $6,000 annually. He added to the notes that the increase in useful life was due to the increasing traffic and popularity and therefore any plans to relocate to the downtown core in the near future have been scrapped.

Required

Provide the report requested by Fran Miller and ensure you address her needs.