Endeavour Twoplise Corporation is a merchandising company that was established over 50 years ago by the Twoplise family. It has been owned and managed in recent years by Endeavour Twoplise Junior, the son of the founder. Endeavour has no family to inherit the business and so, due to ill health, he has decided to sell it to Brenda Forthright. Brenda has no experience of the company's manufacturing process, but she is a very astute businesswoman. As a prelude to investing in the business, she has carried out extensive research into the environment in which the company trades and into its commercial operations. Her investigations have given her some interesting information.

The Product

The company buys and sells one product, a metal cog mechanism which is used in ready-mix concrete vehicles to maintain a 'turning' action of the tub whilst the concrete is in transit. This turning action during transit is vital in order to preserve the required consistency of the concrete for tipping directly into customer's prepared locations. The cog mechanism has to meet stringent quality and safety standards and needs regular replacement during the life of a ready-mix concrete vehicle. The tooling of the mechanism requires expensive specialised equipment.

The Competitive Environment

There are only three major manufacturers of the type of vehicle which uses the company's product, but these vehicles are purchased by a substantially larger number of ready-mix concrete suppliers. Endeavour Twoplise Corp. is one of only a few companies in the Philippines who buy and sell the cog mechanism. Sales have been fairly constant over the last four years, following a downturn in the recessionary period of the late 2000s/early 2010s. Prior to period, this the product was in great demand during the building boom of the 2000s.

The Company's Resources

Endeavour Twoplise Corp. owns a large plot of land, part of which has been developed to provide well-maintained factory premises and part of which remains undeveloped. The land was bought and developed in 2007 and no revaluation has taken place since that date. The factory is large and provides room for expansion within the existing building. Its location is ideal for distribution of products to consumers. Brenda feels that the site is likely to be worth considerably more that its balance sheet value.

The company owns a lorry and a delivery van, both of which are in good condition. Unfortunately, the equipment used in preparing the cog mechanism for sale is old and in need of immediate replacement.

Brenda has made extensive enquiries and has established that new equipment would cost P110,000.

She would retain the old equipment as a backup, since it has no resale value and there is sufficient factory space to store it. Brenda has a number of business contacts and feels confident that she will have no difficulty in raising the additional funds needed to purchase the new equipment.

The company employs four permanent operatives in the factory and hires temporary labor if required. Samuel is the factory supervisor and he also works on the machines. He has been with the company since he left school and is due to retire in two years' time. He tends to be set in his ways and dislikes change. This was shown when Toby, a young operative who joined the company two years ago, tried to initiate changes to the operations which he felt would improve efficiency. Sam was most indignant and threatened to leave if Endeavour made such changes. Since Sam and Endeavour are long-standing friends, Endeavour backed Sam on that occasion and no changes were made. Toby is still working for the company, but this incident has made him rather frustrated. The only other full-time employee is Andy Bucket, an account assistant, who was employed six months ago, because of Endeavour's deteriorating health, to take some of the workload from his shoulders.

The company uses short-term bank loans to support its cash flow requirements. Brenda has negotiated a P30,000 loan to be available to the company when she takes over as owner.

The Company's Systems

Andy is quite a bright young man and is keen to use his initiative. He has a friend who, until recently, was studying accounting on a day-release basis at the local college and this friend recommended to Andy that it would be helpful if the company set up a budgeting system. During the six months in which Andy has been with the company, he has managed to construct a budget for the period to December 31, 2019, with advice from his friend and information from Endeavour and the company records. Unfortunately, shortly after the budget was completed, Andy's friend decided to change jobs. He moved out of the area and so Andy no longer has his advice to guide him. Consequently, although the budget has been constructed, nothing has been done with it.

The budget identified the levels of operations required each month to meet expected demand. The current state of affairs is that sales transactions tends to jog along at a steady rate regardless of demand and, in addition, purchases of the product tend to be on a 'hit and miss' basis. It is mainly by good luck rather than good management that sufficient units are available on time. In Endeavour's opinion, if he can see the men working diligently in the company, he is satisfied that the business is doing okay and so far he has managed to negotiate additional loans and other financing instruments whenever the company has been short of cash. However, the bank has said that any further borrowing by Endeavour would have to be supported by budgets and monitoring information.

The Future

Based on her analysis, Brenda is optimistic about the company's prospects. She feels that the long awaited upturn in the construction industry is imminent and that demand for the product will increase

considerably in the medium to long term. She has thus agreed to buy the business and take over its management in January 2020.

She has already looked carefully at the budget which Andy has produced and is fairly confident that the budgeted balance is a reasonable assessment of the company's assets and liabilities as of December 31, 2019 (see Appendix 1).

Brenda has considerable experience of accounting, having worked for a number of years in this field, and has been able to build upon Andy's efforts. Together they have set about the task of gathering information which will be useful in the planning for 2020.

The results of their labours are as follows:

ESTIMATED FINANCIAL DATA (all amounts are VAT-Exclusive)

Estimated selling price per cog mechanism P250

Estimated purchase price per cog mechanism P110

Wage expense per month P250

Utilities expense per month P300

Rent expense month P200

Purchase of New Equipment

Brenda has decided that the new equipment will be delivered in January. She has made arrangements for the company to issue a 10% note payable with an equivalent value of P130,000 to be repaid in the year 2022. Interest on the note will be paid by two six-monthly instalments, in arrears.

Depreciation (per month)

Buildings P 333

Machinery and Equipment P15,200 (includes depreciation on new equipment) Vehicles P 5,400

Credit Terms and Tax Information

• All sales are on credit and two months' credit is allowed.
• All purchases are on credit and are paid for one month following purchase.
• Wages and other expenses are paid in the month in which they are incurred.
• Bank loan interest is at 6% per year, due within 5 years. Loans are limited to P50,000 a year.
• Income tax rate is fixed at 15% and VAT at 12%.

Proposed Dividend and Additional Share Capital

Since Brenda will make a considerable investment in purchasing the business, she intends to propose a dividend of 5% in October 2020. She is also allowed to issue additional shares of ordinary share capital, but only up to the authorized limit.

REQUIREMENTS:

You have the freedom to create their accounting transactions for the entire year. Minimum of 4 transactions and maximum of 8 per month. Throughout the year, there should be at least 48 and at most 96 transactions.