Spence$$s Supplies Ltd$.($SSL$)$ is a small manufacturer of precision tools used by companies

such as auto parts manufacturers. In November $2024,$ the owner of SSL$,$ Patrick, agreed to sell

the company to Clayton Tool Ltd $($CTL$),$ another manufacturer of precision tools. Each company

is owned and operated by a single individual who originally founded his company. The two

owners agreed that the sale would close February $10$th$,2025$ and that the selling price would be

four times the net income before tax for the year ended December $31$st$,2024.$ Any

disagreements regarding the accounting on the December $31$st $2024$ financial statements are to

be settled first by negotiation between the parties and, if necessary, by arbitration by an

independent third party.

It is now February $1$st$,2025$ with just over a week until the sale deal closes. Jesse, the owner of

CTL has called you and asked you to assess a number of transactions that are reported in

SSL$$s December $31$st$,2024$ financial statements. Based on the examination of the statements,

Jesse is concerned about the accounting implications of some of the transactions reported in

SSL$$s statements. Since the selling price is based off the net income before tax, CTL is

concerned about the accuracy of the numbers. Net income before tax is currently showing as

$$815,000.$

Jesse has asked you for a detailed report explaining the impact of each event on the purchase

price of SSL and your assessment of each of the issues. He would like a full explanation of the

implications of each event, your evaluation of the accounting used by SSL$,$ and your supported

recommendation of the appropriate treatment for each event. Your explanations are important

because they will be used in negotiations with SSL and, if necessary, presented to the

arbitrator.

Jesse is concerned about the following transactions and economic events:

a$)$ On July $1$st$,2024,$ SSL announced it was going to sell some of its older machinery and

custom tools and replace it all with brand$-$new, fully computerized, state$-$of$-$the$-$art

machinery and tools, both which would be fully operational by March of $20$x$6.$ Until that

time, SSL would continue to use the machinery and tools in the existing facility. The

machinery and tools have been listed at a reasonable price. At July $1$st$,$ the equipment

had a carrying value of $$1,000,000$ and a fair value of $$850,000.$ The tools had a

carrying value of $$200,000$ and a fair value of $$300,000.$ SSL reclassed the equipment

and tools and has recorded $$1,200,000$ as assets held for sale.

b$)$ In October $2024,$ SSL was named as a defendant in a lawsuit brought by a customer.

The customer claims that some of the product purchased from SSL was defective and

caused them to lose production time. SSL$$s lawyers believe the company will likely pay

out an amount between $$75,000$ and $$150,000.$ SSL has chosen to record $$75,000$ in

the December $31$st$,2024$ statements.

c$)$ In January $2025,$ SSL was informed that one of its customers had gone bankrupt and

would not be able to pay an outstanding receivable of $$90,000.$ This receivable was

included in Accounts Receivable at year end and was not considered in determining the

allowance for bad debts for the year ended December $31$st$,2024.$

d$)$ During $2025,$ SSL decided to change from FIFO to weighted average inventory costing.

CTL management has determined that the $2025$s ending inventory would have been

reported $$25,000$ lower if FIFO had been used for the year. The change was made on

the basis that their main competitors use the weighted average inventory costing

method.

e$)$ In February $2025,$ SSL$$s management discovered that revenue had been understated in

$2024.$ An employee had incorrectly entered in a sale invoice in $2024$ with a debit to

accounts receivable and a credit to revenue as $$48,000.$ The amount should have been

$$68,000.$ Cost of goods sold and inventory had been properly recorded, but to correct

the revenue error, SSL recorded $$20,000$ of revenue in $2025.$

REQUIRED: Prepare a report to Jesse, the owner of CTL$,$ on your findings and

recommendations.