Manufacturing Inc. (MI) is a public company that sells construction equipment to builders of primarily homes, office buildings, and highways. MI has been in operation for over 30 years. Up until this year the company has had profits with the real estate boom and large amounts of government funding for highway construction. With the recent economic downturn MI has had to go to its bank for increased financing. The bank has imposed a minimum current ratio as well as a minimum balance that must be maintained in one of its accounts. You have been recently hired as an accounting policy analyst to assist MI with its accounting policies. You have just finished meeting with Nancy who is the majority shareholder as well as CEO. Nancy had a lot of questions for you! You are trying to get a handle on what Nancy wants you to do and feeling a little overwhelmed at the moment. The following are comments made by Nancy at that meeting.
“This economic downturn has hit us really hard. We have had profits for a number of years and never worried about having enough cash on hand. Cash is critical in our business where the manufacturing of this specialized equipment can take a long period of time. In addition, our customers are really struggling to be able to invest in new machinery and pay their bills.
“I am very excited that you are able to join us and help out with a number of new situations that have arisen due to the economic downturn and possible solutions I have to solve our current cash crisis. Our bank has been very supportive but they are a little nervous about the economic downturn. I am not sure what, if anything, I need to do in the financial statements and notes about their recent covenant and restrictions. In addition, we have a number of bank accounts with our bank. Our line of credit has been in an overdraft position for over a year now. But we also have positive balances in our other accounts. All of these accounts are currently in cash and cash equivalents on our balance sheet. Is that okay?
“Some of our purchases for our manufacturing purchases are from the U.S. and we are required to pay in U.S. dollars. This has never been an issue for us before since the Canadian and U.S. dollar have been at par. As you know, with the recent economic downturn the Canadian dollar has been dropping in value and is currently at an all time low and may continue to drop. What is the appropriate accounting for this drop in value and what impact will this have on our financial statements?
“Some customers who have been buying from us are having difficulty paying and are currently overdue. I know they will pay eventually and I want to help them out. What I have done is make their life a little easier by changing their accounts receivable to a note. This note allows them a two year period to pay with an interest rate of 4% even though the current market rate is 8%. I have just taken the $500,000 of accounts receivable and reclassified them as a note receivable since I am sure they will pay. Is this okay?
“To get some extra cash I was considering selling some of my high quality receivables to a financial institution. I have $5,000,000 in these receivables. The financial institution will provide me with $4,800,000 in cash if I agree to make any payments that default. What would be the impact of this on my financial statements?
“One last thing: our head office was purchased a long time ago when real estate values were low. Currently, the carrying amount of that building is $520,000 but recent appraisals say it is worth $2 million. So I was thinking I could sell the building then immediately lease it back for its remaining useful life. What do you think of this idea? This could give me some much needed cash and an immediate gain of $1.48 million on my financial statements. “Sorry; I have to run to another meeting. Can you draft up a report on your preliminary ideas to all of my concerns? Thanks, and again we are so glad that you have become part of our team.”

Required:

Prepare the requested report for Nancy.