Question

Abbotsford Tile Ltd. (ATL) is a wholesaler of high quality glass, ceramic and marble tiles. In November 2019 the owner of ATL agreed to sell the company to Barrie Tile Inc. (BTI) another tile wholesaler. Each company is owned and operated by a single individual who originally founded his company. The owner of ATL decided to sell his business because he was beginning to get too old to run the store. The owner of BTI wants to purchase ATL to expand the size of his business. The two men agreed over lunch that BTI would buy ATL for an amount equal to five times ATL’s net income before tax for the year ended December 31, 2019. The deal is to be finalized on March 1, 2020. Closure of the deal requires that BTI approve of the financial statements prepared by ATL. The two men agreed that any disputes regarding the financial statements would be settled by negotiations and, if necessary, by arbitration by an independent third party. It is now January 15, 2020. You have been called by BTI’s owner to help him understand and assess a number of transactions that are reported in ATL’s December 31, 2019 financial statements. The owner of BTI explained that he does not have much experience working with financial statements but based on his examination, along with information obtained from other sources, he is concerned about a number of transactions reported in ATL’s statements. The owner has asked you for a detailed report explaining the impact of each event on the purchase price of ATL and your assessment of each of the issues. BTI’s owner said that he would like a full explanation of the implications of each event, your evaluation of the accounting used by ATL, and your supported recommendation of the appropriate treatment for each event. Your explanations are important because they will be used in negotiations with the owner of ATL and, if necessary, presented to the arbitrator.

The owner of BTI provided you with the following information about the events that are of concern to him:

a) GTL paid a $60,000 non-refundable fee on October 15, 2019 to their delivery company as a prepayment for services from November 1 2019 – November 1, 2020. The contract between the delivery company and GTL is for 2 years. The delivery company charges GTL $20,000 each month, less $5,000 which has been paid up front as the deposit. The $60,000 has been recorded as a prepaid asset. The delivery expense for the year ended December 31, 2019 totaled $30,000.

b) In August 2019, ATL entered into a long term contract with another tile retailer, Great Tile Ltd (GTL). As part of the agreement, GTL agreed to order products from ATL on a monthly basis. In November 2019 GTL placed a large tile order that will be delivered evenly over a 5- month period. The order totaled $350,000, and GTL paid an upfront non-refundable deposit of $150,000. The fee was recorded as revenue. The first order, with $70,000 worth of goods was shipped to GTL on November 20, 2019. The second order was scheduled to ship on December 20, however, due to the busy holiday season and staffing issues, GTL requested that the order be held at ATL’s facility until after the winter break. Since the shipment was ready to go, ATL placed the tiles in a separate part of their facility. ATL recognized revenue for both the November and December orders in 2019, totaling $140,000.

Answer 1

The points to be considered before accapting the contract by BTL. Are

The purchase price of ATL by BTL is five times the net profits before tax. BTL should be sure of the calculation of the netprofits of ATL.

A) in these case  GTL paid a $60,000 non-refundable fee on October 15, 2019 to their delivery company as a prepayment for services from November 1 2019 – November 1, 2020. The contract between the delivery company and GTL is for 2 years.  

30000 is expenses in this year and remaining 30000 should be taken to next year .

so this 30000 should be taken from current year net income

B) in these case In November 2019 GTL placed a large tile order that will be delivered evenly over a 5- month period. The order totaled $350,000, and GTL paid an upfront non-refundable deposit of $150,000. The fee was recorded as revenue.

the revenue 140000 is recorded in current year is correct

reason - november month  they delivered and for december they are ready to delivered but due to standing instruction by company they are not deleverd in this case revenue shoul be recoginised