Ontario Printing Limited Essay

2047 words - 8 pages

In September 2009 Alex Jesse and Evan Shayne decided to end their 10 year business relationship as owners of Ontario Printing Limited (OPL). OPL is a commercial printing business that Alex and Evan organized in 1999. They each own 50% of the common shares of OPL but Alex operates and manages it. Evan participates in major decisions but, for the most part, is not involved in day-to-day operations. Alex and Evan have agreed that Alex will purchase the shares of OPL from Evan at fair market value. They have agreed that fair market value will be equal to five times average net income for the past two years, including the fiscal year ending October 31, 2009. Alex and Evan also agree that the accounting policies should be in accordance with generally accepted accounting principles. Alex and Evan recognize that adjustments to the final selling price might be necessary to take specific circumstances into consideration. Since their decision to part ways Evan has not been involved in any way in the activities and operation of OPL.You obtain the following information about OPL: 1)OPL has used its financial statements primarily for tax purposes. The company writes off any expenditure that it makes that can be justified for tax purposes regardless of whether they have any future benefit.2)The company owns a small building in the north end of the city. Its offices occupy the ground floor of the building and the rest of the building is leased to tenants. Since the building was acquired its market value has increased from $800,000 to $950,000, based on increases in neighbouring property values.3)OPL has two copying machines that do not produce high-quality copies compared with more technologically current equipment. The equipment is used infrequently and only for jobs that do not require high-quality. The equipment has a net book value of $12,920.4)Alex and Evan have charged many personal expenses to the business over the years.5)Alex took a salary of $125,000 during the year. A manager doing Alex's work at a competitor's company would be paid between $50,000 and $75,000, depending on the size of the company and responsibilities. Evan agreed to this salary several years ago.6)In mid-October 2009 Alex launched a major advertising campaign to increase business. Alex hopes the advertising will allow OPL to increase utilization of its equipment and allow it to expand capacity in the near future. During the last two weeks of October OPL spent several thousand dollars for media and direct contact with potential clients.7)In early October 2009 OPL shutdown for two days for annual maintenance of equipment. The work is done each year to ensure equipment operates at maximum efficiency and to avoid costly breakdowns. The annual maintenance was last done in November 2008.8)In late October 2009 Alex sold some equipment at a loss of $37,000 9)During the summer of 2009, Evan negotiated a contract with a customer on behalf of OPL to produce instruction manuals for its products....

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