IC$4\mathrm{.}2$ Brave Maven Inc. $($BMI$)$ operates in challenging economic times. It currently manufactures trncks and

equipment used for construction, as well as off$-$road automobiles and automotive parts. During t$\}$

losses from off$-$road automobiles and parts totalled $$1$ million $($net of tax$).$ Future losses are expe

increase by an additional $$1$ million. BMI's management team is contemplating selling off this unp able

business segment. In December, BMI's board of directors authorized a sale transaction.

Management would also like to expand the production of trucks and construction equipment. BMI's lenders

are not willing to provide additional financing, so BMI will need to explore equity financing. Management is

preparing the necessary documentation for an initial public offering.

The carrying value of the facility and equipment used to manufacture the automobiles and parts is $$2$ million.

Two years ago, some modifications were made to the equipment. The equipment is now specialized for use by

the company. BMI needs to spend $$500,000$ to disassemble the previous modifications to sell the equipment.

By year end, management had hired a contractor to begin disassembling the equipment.

BMI has been in sale negotiations with one of its automotive parts suppliers interested in expanding its own

automotive parts business. Negotiations are expected to continue, but the two companies are not able to agree

on a price. The supplier indicated it is only willing to pay up to $90\%$ of the asking price, since it would have to

make its own modifications to the equipment first. The purchase would only go ahead if BMI completed the

disassembly of the equipment's existing modifications and the supplier's engineer subsequently inspected and

approved the equipment. Management thinks that $90\%$ of the asking price is less than it would be willing to

sell the assets for.

BMI is also in a dispute with one of its suppliers of truck parts. To get a discounted price, BMI had to commit

to purchasing $$500,000$ of spare parts each year for three years. BMI recently upgraded its safety standards

and consequently made modifications to iffic construction trucks in the current year. As a result, management

did not accept delivery from this supplier for the spare parts in the current year. There is a provision in the

contract that stipulates an annual penalty of $$250,000$ for failure to take delivery. One more year remains in

the contract. BMI's lawyers are reviewing the contract. They have suggested that BMI may qualify for

exemption from the penalty for not taking delivery because its refusal resulted from a change in the safety

specification for the part and not because of a change in sales demand. The supplier is willing to modify its

spare parts to conform to BMI's new safety standard.

Just before year end, management purchased an additional building. BMI plans to use $50\%$ of the building

and move the current sales team to the new location. It does not plan to use the other $50\%$ for its current

operations. BMI's real estate agent inspected the property and believes the unoccupied portion of the building

can be sold or leased separately. Management does not want BMI to use fair value as its basis for

measurement because it is concerned that changes in fair value will create too much volatility in the income

statement. This may lower the price that BMI sells it shares for in the future public offering.

Instructions

It is now two months after year end. Assume the role of BMI's auditor and discuss the financial