Question

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

Answer 1

HI students please find your answer below.

1. Accounting for Lease
1	Cost	19,404.00
2	Accum Depreciation	19,404.00
		Dr	Cr
1	Operating Lease A/c..Dr	18143
	To Statement of Profit or Loss		18143
	(Being Operating lease recognised)
2	Depreciation on Assets on Lease	2842
	to , Assets on Lease		2842
	Being Depn charged on Assets on Lease
2. Accounting for Preferred Shares
	Statement of Profit or Loss A/c Dr	4000
	To , Dividend on Preferred Shares		4000
	(Being Dividend of Preferred shares recorded)
3. Accounting for Post Employment Benefits
	Accounting for Post Retirement benefits to be as follows.
	Employee benefits are all forms of consideration that is given by an entity to its employees in exchange for services rendered by the employees. Employee benefits include benefits provided to either employees or their dependants. Employee benefits can be settled by either cash payments or by the provision of goods or services. The employee benefits can be settled by payment either directly to the employees, to their spouses, children or other dependants or to others, such as insurance companies.
	Post-employment benefits are one of the types of employee benefits. They are the benefits which will need to be paid after the employee has completed his/her employment. The examples of post employment benefits include pensions, other retirement benefits, post-employment life insurance and post-employment medical care.
	It should be noted that the termination benefits are not considered to be the post-employment benefits. The termination benefits are employee benefits payable as a result of either an entity’s decision to terminate an employee’s employment before the normal retirement date or an employee’s decision to accept voluntary redundancy in exchange for those benefits. The termination benefits to encourage employees to leave service voluntarily.
	The post-employment benefits are attributed to the periods in which the obligation to provide post-employment benefits arises. The obligation to provide post-employment benefits arises as the employees render services in return for post-employment benefits which an entity expects to pay in future reporting periods. Actuarial techniques are used to measure this obligation with sufficient reliability to justify recognition of a liability.
4, Accounting for Long term Notes Payable
	In business accounting, notes receivable are promissory notes that represent an asset. These promissory notes are either short-term or long-term and should be recorded on the balance sheet differently.
	Notes receivable include principal and interest, and short-term and long-term notes receivable have the same interest calculation. However, on long-term notes receivable, unpaid interest can be carried over from year to year.
	Customers sign promissory notes, which are recorded as notes receivable, in exchange for merchandise or when their account is past due. When a customer signs a promissory note for a past due account, the principal amount is recorded on the balance sheet by debiting accounts receivable and crediting notes receivable. When a customer signs a promissory note in exchange for merchandise, it is recorded on the balance sheet by crediting sales and debiting notes receivable.
5. Accounting for Future Tax Liability
	Future Tax Liability or Deferred Tax Liability is the amount of Tax to be paid in future peiod in respect of Taxable temporary difference which arise on account of certain deduction/ allowances which are allowed or disallowed in the current year and allowed in the future peiod.
	Deferred Tax liability should be recognised for all taxable temporary differences..