Inventory is carried at the lower of cost and net realizable value.
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DFW has provided a guarantee on $50,000 of debt for a related company, Thunder Bay Springs (TBS). TBS has been experiencing financial difficulties, and there is a 10% chance that it may be insolvent within the next six months. TBS is currently working with its bank to refinance its debt and avoid bankruptcy.
1. DFW is being sued by a former employee for wrongful dismissal. The employee is suing DFW for $40,000, and the case is currently in mediation. Legal counsel suggests that it is unlikely that $40,000 will be paid out, but there is a 50% chance of paying $20,000 and a 50% chance of paying $10,000. The case will likely settle at the end of next year.
2. DFW is suing a competitor for infringement regarding the use of its trademarked logo. Legal counsel suggests that it is very likely that DFW will be awarded a settlement of $25,000.
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 financial statements required to comply with ASPE.