Question

You, CA, are in charge of the audit of Fuschia Enterprises, a manufacturer of crayons in Vancouver, British Columbia with sales in 2012 of $75 million. This year, sales have increased due to increasing their market share in Eastern Canada. The company has assets of $40 million and their net income last year was $6.5 million. The common shares of the company are widely owned. In previous years, the company relied on your firm for advice.
You recently visited the company’s head office with the partner in charge of this file to discuss matters relating to the company’s December 31, 2013 year-end. A follow up meeting has been scheduled for two weeks from now and the partner would like you to prepare a memo that addresses any issues identified in the meantime in preparation for this meeting.
During the visit, you made the following notes:
Effective June 30, 2013 Fuschia Enterprises purchased Neon Limited, a company engaged in the production and distribution of coloring books. Management of Fuchsia Enteprises felt that Neon Limited would be a complement to their existing business. After the acquisition date, Neon Limited ceased to exist. At the date of acquisition, the statement of financial position of Neon Limited was as follows:
Cash 
$501,633 
Accounts receivable 
$475,103 
Inventory 
$982,290 
Property, plant and equipment (net) 
$627,201 
Intangible assets 
$471,203 
Goodwill 
$293,112 
Total assets 
$3,350,542 
Bank indebtedness 
$625,102 
Accounts payable 
$587,201 
Long-term debt 
$901,201 
Common shares 
$100,000 
Retained earnings 
$1,137,038 
Total liabilities and shareholder’s equity 
$3,350,542 
Intangible assets consists of research and development costs capitalized during the year relating to work that was performed internally for developing new printing technology, the benefits of which were going to be launched starting this fiscal year. Fuschia Enterprises had a valuation performed and it was estimated that the fair value of this technology was $600,000.
The goodwill relates to an acquisition that Neon Limited had made several years ago to acquire a small competitor.
The assets and liabilities approximate their net book values recorded above except for property, plant, and equipment (net), which has a fair value of $550,000 and inventory which has a fair value of $1,025,000.
The purchase price paid to the shareholders of Neon Limited consisted of $1,600,000 paid on June 30, 2013. In addition, if net income of Neon Limited exceeds $1 million in the first full year after the acquisition, an additional $250,000 will be payable. Fuschia Enterprises believes that there is a 65% chance of attaining this goal.
During the year,Fuschia Enterprises instituted a new management compensation plan whereby certain members of senior management will be paid an annual bonus based on audited net income.
Required- Prepare the report requested by the partner that addresses and discusses the accounting issues identified with respect to Fuschia Enterprises.


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  • CreatedJune 09, 2015
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