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You are an accountant working at Hasfa & Co. George Maranzan, a partner in your firm, leaves you the following voicemail message: The scheduling manager

You are an accountant working at Hasfa & Co. George Maranzan, a partner in your firm, leaves you the following voicemail message:

"The scheduling manager tells me you have some time available. We have recently been advised that management of Back-I-Up Corporation (BIUC) has received an offer from Ventura Capital partners to sell 100% of all issued an outstanding common shares. I have a meeting with management in two weeks regarding this issue, and I havent had much time to think about this engagement.

I have prepared some background informationon the company for you to review, including background information on the client (Exhibit 1), the company's most recent internal financial statements (Exhibit11), and the proposed share purchase agreement (Exhibit 111). I have also met with BIUC management earlier this month and made some notes from that meeting (Exhibit 1V). they should all be in your inbox by now.

Can you please prepare a report that I can use for the upcoming meeting?

Required:I am glad that you have some time available!"

Prepare the report for George

Exhibit 1 - Background Information

Back-It-Up Corporation (BIUC) duplicates videotapes, DVD's CD's, and all forms of electronic files from master copies provided by its clients. The company started operations in 2000 in the basement of the home of part-owner, Samantha Arthurs. Sales increased quickly, and within one year of starting operations the company moved into rented space in downtown Toronto.The market that BIUC currently serves is mainly large companies that require training programs, corporate messages, and so on.

The company is owned equally by Samantha Arthurs, Grant MacArthur, and Ashley Carvalho. Samatha started the venture and has always managed the sales function. In order to keep the company growing, she brought in Grant and Ashley as equal shareholders. Grant and Ashley each paid $30,000 for one third of Samantha's shares.

Grant is a good administrator and handles the accounting functions of the company. Samantha's skills are mainly in sales. Ashley looks after the production end and stays abreast of changes in technology.

BIUC has an October 31 fiscal year end.

Exhibit 11 - Internal Financial Statements

Statement of Financial Position

As at October 31 (unaudited)

2017

2016

Assets

Current

Cash

$ 151,764

$ 160,502

Accounts Receivable

$ 334,894

$ 411,760

Inventory

$ 86,800

$ 124,200

Prepaid Insurance

$ 4,720

$ 2,060

$ 578,178

$ 698,522

Capital assets (note 1)

$ 661,897

$ 417,158

Future Income Tax (note 2)

$ 35,000

$ 35,000

Long-Term note receivable

$ 20,000

$ -

$ 1,295,075

$ 1,150,680

Liabilities and Shareholders' equity

Current

Accounts payable

$ 158,318

$ 130,176

Bank Loan - current portion

$ 41,998

$ 72,000

Income tax payable

$ 44,609

$ 92,720

$ 244,925

$ 295,096

Long-term bank loan (note 3)

$ 35,334

$ 77,334

Due to shareholders

$ 58,100

$ 53,100

Common Shares

$ 1,200

$ 1,200

Preferred Shares

$ 20,000

$ 20,000

Contributed surplus

$ 4,000

$ -

Retained earnings

$ 931,516

$ 703,950

$ 956,716

$ 725,150

$ 1,295,075

$ 1,150,880

Statement of Income

For the year ended October 31 (unaudited)

2017

2016

Sales

$ 2,531,760

$ 2,221,720

Cost of Sales

Opening Inventory

$ 124,400

$ 26,860

Purchases - Materials

$ 1,018,972

$ 959,138

- Wages

$ 289,663

$ 219,416

Total

$ 1,433,035

$ 1,205,414

Closing Inventory

$ (86,800)

$ (124,400)

$ 1,346,235

$ 1,081,014

$ 1,185,525

$ 1,140,706

Expenses

Commissions

$ 199,372

$ 174,957

Depreciation

$ 127,684

$ 104,796

Managaement Salaries and Benefits

$ 110,448

$ 110,040

Management Fees

$ 109,600

$ 112,600

Rent

$ 75,840

$ 74,020

Office and general expenses

$ 48,723

$ 46,877

Advertising and promotion

$ 37,585

$ 31,284

Repairs and Maintenance

$ 27,173

$ 24,686

Automobile and travel

$ 26,326

$ 22,782

Bad Debt

$ 15,596

$ 21,188

Interest

$ 16,864

$ 39,320

Computer system installation

$ 13,760

$ -

Telephone

$ 13,458

$ 10,510

Insurance

$ 10,864

$ 10,214

Legal and Accounting

$ 8,083

$ 3,414

Lease expense

$ 18,143

$ -

$ 859,519

$ 786,688

Operating Income

$ 326,006

$ 354,018

Gain on sale of equipment

$ 4,560

$ -

Income before taxes

$ 330,566

$ 354,018

Provision for income taxes

$ 99,000

$ 112,000

Net income

$ 231,566

$ 242,018

Opening balance - retained earnings

$ 703,950

$ 465,932

Dividend on preferred shares

$ (4,000)

$ (4,000)

Closing balance - retained earnings

$ 931,516

$ 703,950

Notes to the Financial Statements

1. Capital Assets

2017

2016

Cost

Accumulated Depreciation

Net Book Value

Net Book Value

Furniture and fixtures

$ 23,434

$ 12,418

$ 11,016

$ 13,770

Computer Equipment

$ 50,842

$ 12,835

$ 38,007

$ 18,421

Leasehold Improvements

$ 19,404

$ 19,404

$ -

$ 2,842

Vehicle

$ 40,352

$ 27,985

$ 12,367

$ 17,667

Production Equipment

$ 931,074

$ 330,567

$ 600,507

$ 364,458

$ 1,065,106

$ 403,209

$ 661,897

$ 417,158

2. Future Income Tax

A future tax asset has been recorded for non-capital losses carryforward. The losses were incurred during a bad year in fiscal 2015. BIUC expects strong future profits to be able to generate taxable income to fully utilize the tax losses. The owners decided not to use the tax losses in 2017 or 2016 fiscal years because they expect their marginal tax rate to increase significantly in the near future due to significant growth in income.

3. Bank Loan

A small business bank loan and line of credit for $200,000 (presently unused) are secured by a general security agreement, a registered general assignment of book debts, and a chattel mortgages on duplication equipment. Principle repayments on the small business loan are due as follows during the years ended Oct 31:

2018

$ 41,998

2019

$ 20,034

2020

$ 11,700

2021

$ 3,600

Interest on the small business bank loan is paid at 12% on the outstanding monthly balances. Interest on the line of credit is calculated at prime plus 1.5% on outstanding monthly balances.

Issues to address:

Identification and Analysis of Issues (80%)

Issue 1: Accounting for the Lease

Issue 2: Preferred Shares

Issue 3: Post-retirement benefits

Issue 4: Long-term Note Receivable

Issue 5: Future Tax Liability

2.

Recommendation on how to address issues

a. Provides appropriate recommendation given the case facts and analysis completed

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