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Alexander Electronics Ltd.

Alexander Electronics Ltd. (AEL) is a retailer of home electronics, software, music, and video games in a medium-sized Canadian city. The store has been in business for many years and has grown along with the community. Recently, AEL’s owner decided to sell the store because he felt he was too old for the rigours of operating it. Ryan Evans has expressed interest in buying AEL and he and the current owner have been negotiating for several months. Mr. Evans has worked for AEL as a marketing manager and he is confident it will continue to be successful. Buying AEL will also fulfill a lifelong ambition of Mr. Evans to own his own business. The current owner and Mr. Evans have agreed in principle to base the selling price on AEL’s net income before unusual items for the year ended December 31, 2009.

It’s late January 2010. Mr. Evans has just received AEL’s 2009 financial statements. For the most part he’s satisfied with the statements but he has some concerns and has approached you for advice regarding these. He would like a report evaluating the appropriateness of the treatments used in AEL’s 2009 income statements for purposes of determining the price he should pay.

1) AEL has been given exclusive distribution rights in the region for a new video game called Zordef of the Deep (Zordef). Zordef is scheduled to be released on February 5, 2010. When AEL learned in early December 2009 it would have exclusive distribution rights it set up a program that would allow people to guarantee themselves a copy of Zordef as soon as it is released. Under the program a customer would purchase the game in advance by paying the full retail price. When they paid the customer would receive a certificate that could be exchanged for Zordef when it was released. As of December 31, 2009 over 4,000 people signed up and paid $69.99 for Zordef. AEL’s cost per copy will be $45.00. AEL will have to pay the manufacturer of Zordef 30 days after the game is...
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