Dryden Natural Springs (DNS) sells bottled water that comes from a fresh water spring in the town of Dryden, Ontario. DNS owns the land, and much of the surrounding area, where the fresh water spring is located. In addition, DNS has all of the equipment needed to extract the water from the spring and place it into bottles.

As a young, newly qualified professional accountant, you are looking to get out of public practice and become an active owner/manager of a small business. An opportunity has arisen to purchase all of the common shares of DNS, and you are contemplating this acquisition.

Th e significant competition in the bottled water market, combined with the relatively small operation of DNS and lack of brand equity, suggest that there is currently no significant goodwill associated with DNS’s earnings. Accordingly, the purchase price will be based on DNS’s net book value, calculated in accordance with ASPE, with an adjustment for only the fair value of capital assets. Your intention is to use your business network, and social media marketing skills, to expand DNS’s operations and increase profi tability.

As part of your due diligence, you discovered the following information:

1.

The long-term debt is payable to a local credit union. No payments must be made until the end of 10 years, at which point the principal and all accrued interest are due in full. DNS received $250,000 four years ago to this day, and interest accrues at 6% annually.

2.

DNS implemented a new rewards program at the beginning of this year. DNS included a liner under the bottom of each cap. The liner includes the text: (1) free bottle of water; or (2) please try again. One in 10 bottles includes a free bottle of water. The promotion was a success. A total of 105,455 bottles were sold during the year, and 4,556 free bottle liners were redeemed. The cost of a bottle of water is $0.75 and the retail value is $1.50.

3.

Capital assets are appraised at $485,000 by an independent, qualified third party.

4.

The capital stock includes common shares and preferred shares. There are 500 preferred shares with a cost and redemption value of $10 and $12 per share, respectively, and a 6% mandatory, cumulative dividend yield. These shares will be retained by the current owners of DNS.

A copy of DNS’s most recent internal statement of financial position is presented in Exhibit I. DNS has never had an audit or review.

Required Based on your review of the financial statements and the information obtained during due diligence, prepare your estimate of the purchase price. Be sure to fully discuss any proposed changes to the fi nancial statements required to comply with ASPE.