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Dryden Natural Springs Case Analysis
Dryden Natural Springs Case Analysis
Introduction
This case is about a potential buyer who wants to purchase all of the common shares of a small
bottled water company called Dryden Natural Springs (DNS). DNS follows ASPE in accounting
principles, accordingly any buyers or investors should read and analyze DNS ‘s Financial
statement under ASPE.
Accounting Issues
The key accounting issue of this case is to decide the proper purchase price for all common
shares of DNS.
The purchase price will be based on DNS’s net book value (NBV), calculated under ASPE, with an
adjustment for only the fair value of capital assets. The NBV given in the most recent unaudited
statement of financial position is $225,790.
Adjusted Entry:
Dr. Premium Expense 4493
Cr. Estimated Liability for Premiums 4493
Recommendation: Purchase price should be reduced by $4493
Capital assets Appraise
Capital assets are appraised at $485,000. ASPE allows the fair value option for all
financial instruments as long as the amount valued is reliable. The new price of
$485,000 is appraised by an independent, qualified third party, so this value can be
treated as the fair value of the assets.
$485,000 -$455,775 = $29,225
Recommendation: Purchase price should be increase by $29,225
Preferred Shares retained
The preferred shares shall be retained by the current owners DNS, so this part should be
exclude from the purchase of the common shares. Under ASPE, value of preferred
shares should be recorded at its book value:
$10 x 500 = $5000
Recommendation: Purchase price should be reduced by $5,000
Guarantee/commitment
DNS has provided a guarantee on $50,000 debt for a related company. Under ASPE,
such financial guarantee fall under the loss contingence stands, which is “loss likely and
amount reasonably estimated”. As there is only a 10% chance that the debt may be
insolvent, so no need to accrue the guarantee.
Contingencies
1. DNS is being sued by a former employee, and legal suggests it is 50% of paying
$20,000 and 50% of paying $10,000. Under ASPE, a liability incurred as a result of a loss
contingency is a contingent liability. To determine whether a liability should be
recorded, the following is evaluated: the time period in which the underlying cause of
action occurred; the likelihood of an unfavorable outcome; the ability to reasonably
estimate the loss. DNS can accrue $10,000 contingency loss.
Recommendation: Purchase price should be reduced by $10,000
2. DNS is suing a competitor and legal counsel suggests that it is very likely that DNS
will be awarded a settlement of $25,000. Under ASPE, gain contingencies are not
recorded in the accounts. So DNS would certainly ask any potential buyer to pay for
this contingency gain.
Recommendation: Purchase price should be increase by $25,000
Conclusion
Based on the above analysis, the purchased price of DNS common shares should be: $225,790 –
$65,619 - $4493 + $29,225 - $5,000 - $10,000 + $25,000 = $194,903