You are an accountant working at Robi & 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 Better World Storage Corporation (BWSC) has received an offer from Ventura Capital Partners to sell 100% of all issued and outstanding common shares. I have a meeting with management in two weeks regarding this issue, and I haven't had much time to think about this engagement. I have prepared some background information on the company for you to review, including background informa- tion on the client (Exhibit I), the company's most recent internal financial statements (Exhibit II), and the proposed share purchase agreement (Exhibit III). I also met with BWSC management earlier this month and made some notes from that meeting (Exhibit IV). They should all be in your inbox by now. Can you please prepare a report that I can use for the upcoming meeting? I am glad that you have some time available!" Required Prepare the report for George. ribit I Background Information Better World Storage Corporation (BWSC) duplicates, DVDs, has always managed the sales function. In order to keep the company MP3s, and all forms of electronic files from master copies provided growing, she brought in Grant and Ashley as equal shareholders. by its clients. The company started operations in 2000 in the Grant and Ashley each paid $30,000 for one-third of Saman- basement of the home of part-owner, Samantha Arthurs. Sales tha's shares. increased quickly, and within one year of starting operations the Grant is a good administrator and handles the accounting company moved into a rented space in downtown Toronto. The mar- functions for the company. Samantha's skills are mainly in sales. ket that BWSC currently serves is mainly large companies that Ashley looks after the production end and stays abreast of changes require training programs, corporate messages, and so on. in technology The company is owned equally by Samantha Arthurs, Grant BWSC has an October 31 fiscal year end. MacArthur, and Ashley Carvalho. Samantha started the venture and Exhibit II Internal Financial Statements Statement of Financial Position As at October 31 (unaudited) 2020 2019 Assets Current Cash Accounts receivable Inventory Prepaid insurance $ 151,764 334,894 86,800 4,720 578,178 661,897 35,000 20,000 $1,295,075 $ 160,502 411,760 124,200 2,060 698,522 417,158 35,000 Capital assets (note 1) Future income tax asset (note 2) Long-term note receivable 0 $1,150,680 Liabilities and shareholders' equity Current Accounts payable Bank loan-current portion Income taxes payable $ 158,318 41,998 44,609 244,925 35,334 58,100 $ 130,176 72,000 92,720 295,096 77,334 53,100 Long-term bank loan (note 3) Due to shareholders 1,200 Common shares Preferred shares Contributed surplus Retained earnings 20,000 4,000 931,516 956,716 $1,295,075 1,200 20,000 0 703,950 725,150 $1,150,880 Exhibit II Internal Financial Statements (Continued) Statement of Income For the years ended October 31 (unaudited) 2020 2019 Sales $2,531,760 $2,221,720 Cost of sales Opening inventory Purchases -materials -Wages Total 124,400 1,018,972 289,663 1,433,035 (86,800) 1,346,235 $1,185,525 26,860 959,138 219,416 1,205,414 (124,400) 1,081,014 $1,140,706 Closing inventory Gross profit Expenses Commissions Depreciation Management salaries and benefits Management fees Rent Office and general expenses Advertising and promotion Repairs and maintenance $199,372 127,684 110,448 109,600 75,840 48,723 37,585 27,173 $ 174,957 104,796 110,040 112,600 74,020 46,877 31,284 24,686 Repairs and maintenance 27,173 24,686 Threats Competition Safety Concem Legal trouble Automobile and travel Bad debt Interest Computer system installation Telephone Insurance Legal and accounting Lease expense 26,326 15,596 16,864 13,760 13,458 10,864 8,083 18,143 $859,519 326,006 4,560 330,566 99,000 231,566 703,950 (4,000) $ 931,516 22,782 21,188 39,320 0 10,510 10,214 3,414 0 $ 786,688 354,018 0 Operating income Gain on sale of equipment Income before taxes Provision for income taxes Net income Opening balance-retained earnings Dividend on preferred shares Closing balance-retained earnings 354,018 112,000 242,018 465,932 (4,000) $ 703,950 Exhibit II Internal Financial Statements (Continued) Notes to the Financial Statements 1. Capital assets 2020 2019 Accumulated Net Book Net Book Cost Depreciation Value Value Furniture and fixtures Computer equipment Leasehold improvements Vehicle Production equipment $ 11,016 38,007 0 $ 23,434 50,842 19,404 40,352 931,074 $1,065,106 $ 12,418 12,835 19,404 27,985 330,567 $403,209 $ 13,770 18,421 2,842 17,667 364,458 $417,158 12,367 600,507 $661,897 2. Future income tax asset A future tax asset has been recorded for noncapital losses carryforward. The losses were incurred during a bad year in fiscal 2018. BWSC 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 the 2020 or 2019 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 chattel mortgages on duplication equipment. Principal repayments on the small business loan are due as follows during the years ended October 31: 2021 2022 $41,998 20,034 11,700 3,600 2023 2024 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. Exhibit III Share Purchase Agreement Purchase Price Calculation Earnings Multiple The final purchase price is to be determined based on an adjusted A goodwill multiple of between 1 and 2 is common for similar book value approach, whereby all assets and liabilities are adjusted companies. to their fair values to determine the fair value of the equity. In addition, a premium for goodwill will be calculated based on a mul- Net Income tiple of net income for the most recent fiscal year. Net income must be determined based on generally accepted Therefore, the purchase price is calculated as follows: accounting principles (IFRS). Purchase Price = Adjusted Equity Value + (Net Income x Earnings Multiple) Adjusted Book Value All assets, liabilities, and equities must be recognized and measured in accordance with generally accepted accounting principles (IFRS). Exhibit IV Notes From George's Meeting with Grant Macarthur New lease agreement BWSC signed an agreement on November 1, 2019, to lease equip- ment from Sultan Leasing. The following information relates to the agreement: 1. The term of the noncancellable lease is five years, at which time the asset is expected to have a residual value of $7,000, which is not guaranteed. 2. The asset's fair value, at November 1, 2019, is $80,000, with an economic life of seven years. 3. The asset will revert to Sultan at the end of the lease term, at which time the asset is expected to have a residual value of $7,000, which is not guaranteed. 4. Sultan leasing assumes direct responsibility for the executory costs. 5. The agreement requires equal annual rental payments of $18,143, beginning on November 1, 2019. 6. The lessor's implicit rate is 10% and is known to BWSC. Grant has recorded this as an operating lease and expensed the annual payment during the fiscal year. Preferred shares On November 1, 2019, BWSC issued 2,000 redeemable and retract- able preferred shares at a value of $10 per share. The shares are redeemable by BWSC at any time after January 2021. The shares are retractable for the original $10 per share at the discretion of the holder at any time up to January 2021, after which the retractable feature expires. The preferred shares require the payment of a mandatory $2 per share during the retraction period, after which the dividends become noncumulative and are paid at the discretion of the board only Long-term note receivable On July 1, 2020, BWSC provided certain services to a preferred customer in exchange for a long-term note receivable. BWSC provided its services in exchange for five payments of $4,000. BWSC provided its preferred customer with this offer to help stim- ulate the sale given the recent financial crisis. The first payment is due July 1, 2021. Loyalty program points Provision for income taxes During the most recent board meeting, it was decided that BWSC will begin offering points under a loyalty program. BWSC will pro- vide its customers with 1 point for every $100 spent. The points can then be redeemed for a discount on future services. A total of 100 points will result in a $500 discount. The provision for income taxes included in the financial statements is recorded based on the taxes payable in the current period (that is, the amount payable based on taxable income). Management has prepared the calculation by focusing only on the undepreciated capital cost (UCC) and depreciation difference because they are unsure of any other differences. A review of Schedule 8 of the Corporate T2 reveals UCC bal- ances of the following: Postretirement benefits BWSC has just implemented and sponsored a defined benefit plan for its employees in fiscal 2020. No past service benefits have been granted The following additional information was obtained from an actu- arial report that has been prepared as at the year end: Cost UCC Furniture and fixtures Computer equipment Leasehold improvements Vehicle Production equipment $23,434 50,842 19,404 40,352 931,074 $10,518 6,835 19,404 29,985 289,567 Service cost for 2020: Discount or settlement rate: Actual return on plan assets for 2020: Contribution (plan funding) in 2020: Expected rate of return for 2020: $95,000 8% 8% $87,000 8% The total capital cost allowance taken in 2020 was $140,545. The average tax rate for BWSC is 31.16% on the current year's income. The initial contribution of $87,000 was made on August 1, 2020. Currently, BWSC has expensed the contribution as part of the management salaries and benefits (on the income statement). Please prepare a report for George including resolutions and recommendations for all above issues (Accounting for Lease Agreement, Preferred Shares, Loyalty Program, Long-Term Note Payable, Income Taxes, and Post-Retirement Benefits)