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Green Leaf Automobiles Ltd. (Green Leaf) is a British Columbia-based manufacturer of electric cars. The company was founded as a private corporation in 2005 by three friends: David Wallace, Janet Levinson, and Ryan Howard.

The companys newest model, the 300-E, has been a sales success due to its ability to travel up to 300km on a single charge of its battery, making the car well-suited to most buyers daily commutes. As well, with prices starting at $25,000, the car is affordable to many consumers, allowing those who may have always wanted an electric car, but been unable to afford one, the opportunity to purchase one now.

Today is January 3, 2018, and while the companys performance has been strong, Ryan Howard would like the company to buyout his shares so he can move to New York with his girlfriend, Kelly. The buyout would involve Green Leaf paying Ryan a specified fee for his shares and in exchange, Ryan would no-longer be a shareholder.

You, CPA, have been hired by David and Janet to advise them as to how much they should pay Ryan for his shares, based on the terms of the Shareholder Agreement (Appendix I).

Ryan has served as the companys Chief Financial Officer (CFO) since its inception in 2005 and has prepared financial statements he would like you to use to calculate the buyout price (Appendix II).

David and Janet would like you to carefully analyze the financial statements, as they want to ensure the buyout price paid to Ryan is fair. David and Janet have provided additional information for your analysis in Appendix III.

Appendix I Excerpts from Green Leafs Shareholder Agreement

This agreement made on the FIFTH day of JANUARY, 2005 between MR. DAVID WALLACE, MRS. JANET LEVINSON, and MR. RYAN HOWARD (herein referred to as the Shareholders) and GREEN LEAF AUTOMOBILES LTD. (herein referred to as Green Leaf) seeks to establish the conditions of a share buyout.

i. Any of the Shareholders may give notice of the intent to sell their shares

ii. 90 days after the notice of intent has been given, Green Leaf will pay the Shareholder a buyout fee calculated using the prescribed formula in (iii) below

iii. The buyout fee shall be calculated using the following prescribed formula:

Total assets as calculated on the most recent balance sheet as at December 31 MINUSTotal liabilities as calculated on the most recent balance sheet as at December 31

EQUALS Entity value Entity value MULTIPLIED BY the number of shares owned by the shareholder

requesting the buyout DIVIDED BY the total number of shares outstanding

EQUALS Buyout price

iv. The share ownership is structured as follows:

David Wallace 33

Janet Levinson 33

Ryan Howard 33

Total Shares Outstanding = 99

i. For purposes of calculating the buyout fee, the companys financial statements must be prepared in accordance with Accounting Standards for Private Enterprises (ASPE).

ii. Green Leaf has the right to hire an independent party to verify the accuracy of all financial information used in calculating the buyout price.

Appendix II December 31 Financial Statements Prepared by Ryan Howard, CFO

Appendix III Additional Information Provided by David Wallace and Janet Levinson

Inventory: 300-E

When accounting for the inventory of Green Leafs newest car, the 300-E, Ryan decided to use the weighted average cost method (WACM). David and Janet were puzzled by this decision because in the past, Green Leaf had always used the first-in, first-out (FIFO) method to account for its vehicle inventory. David and Janet believe the FIFO method made the most sense because Green Leaf always ships its oldest cars first to ensure inventory does not become obsolete. David did some research which revealed most of Green Leafs competitors also use the FIFO method. David is sure this change will not affect the financial statements because the number of cars in ending inventory is the same regardless of the method chosen, but just in case, he has provided you with the following inventory schedule.

Inventory: 250-E

Before Green Leaf developed the 300-E, it had been selling its previous model, the 250-E. Green Leaf still has 130 units of the 250-E in ending inventory at December 31, 2017, each with a unit cost of $14,587.88 being used on the balance sheet. Janet noted she was not sure how Green Leaf was going to sell all these 250-E models, given the 300-E had been so popular. Janet examined the December 2017 sales records which revealed the 250-Es had been selling for $13,500 each. Ryan told Janet ASPE requires assets to be recorded at cost, and as such, the $14,587.88 cost being used on the balance sheet for each car was appropriate. Janet thought this sounded reasonable, seeing as this is how the 300-E inventory is being recorded.

Advertising Cost

In 2017, Green Leaf hired a reputable advertising agency, Sterling Cooper, to develop a television commercial for the new 300-E. The commercial aired during December 2017, but Green Leaf does not have to pay Sterling Cooper until January 2018. The commercial will cost Green Leaf $120,000, but Ryan has not yet recorded the expense because Green Leaf only received the invoice in January 2018; as such, Ryan says the expense should not be recorded in 2017, because Green Leaf did not receive the bill in 2017.

Car Sales

On December 29, 2017 Green Leaf loaded ten (10) 300-Es onto a ship to Japan as per a customers order. The terms of the agreement state the price of each car is $25,000, and the terms are 2/10, n/30, FOB Destination. It will take 10 days for the ship to arrive in Japan. Ryan recorded the revenue and cost of goods sold associated with this sale, stating since the cars were on the ship to the customer, the sale was official and therefore revenue can be recognized.

Accounts Receivable

During the year, the economy improved, and Green Leafs customers began paying their accounts receivable balances more frequently. As a result, Ryan decided Green Leaf does not need to record any allowances for doubtful accounts because most customers are now paying their bills. Janet did some research and confirmed that the economy had indeed improved. She also noted that at competing car companies, 2017 bad debt levels were, on average, 75% of 2016 bad debt levels because of the economic improvement. Green Leafs 2016 bad debts were similar to competitors 2016 bad debts.

Manufacturing Equipment

Green Leaf uses robots to manufacture some components of the 300-E. During the year, one of the robots short circuited, and an engineer had to spend two weeks replacing the robots circuit boards. The cost for the engineer to do this was $120,000 cash, which Ryan recorded as follows:

dr. Manufacturing equipment 120,000 cr. Cash 120,000

Green Leaf Automobiles Ltd. Income State ment For the year ended December 31, 2017 Sales revenue S 451,200,000 358,990,000 92,210,000 Cost of goods sold Gross margin Operating expenses Wage expense Factory expense 50,321,000 28,598,000 8,766,000 988,000 88,673,000 3,537,000 954,990 $2,582,010 Depreciation expense Interest expense Total operating expenses Earnings before tax Income tax expense Net income Green Leaf Automobiles Ltd. Balance Sheet As at December 31, 2017 Assets Current assets Cash $ 5,500,000 9,289,000 10,154,000 24,943,000 12,246,000 $ 37,189,000 Accounts receivable Inventory Total current assets Manufacturing equipment, net Total assets Liabilities and Shareholders' Equity Liabilities Current liabilities $3,431,000 954,990 4,385,990 21,222,000 25,607,990 Accounts payable Income tax payable Total current liabilities Notes payable Tota abilities Shareholders' Equity 99,000 11,482,010 11,581,010 $ 37,189,000 Contributed capital Retained earnings Total shareholders' equity Total liabilities and share holders' equity

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