- IMPORTANT INFORMATION regarding changes to the case information:
- Assume that the purchase of equipment and issuance of debt/equity occurs on January 1, 2020 for all 3 arrangements. (not January 1, 2021 erroneously mentioned in arrangement 1).
- For Acquisition Arrangement #3 assume that only common shares will be issued no preferred shares.
- For the purposes of ratio analysis, assume that prior to adopting any of the acquisition arrangements the following classification amounts exist
| Current Assets | $2,000,000 |
| Current Liabilities | $1,000,000 |
| Total Liabilities | $3,000,000 |
| Total Shareholders Equity | $2,000,000 |
- The additional accounting items addressed in Exhibit 2 Other Details will be for bonus marks:
- Provide only a discussion on how these two items would affect the current ratio and the debt to equity ratio
- No calculations are required or journal entries
- Information on contingent liabilities and customer loyalty programs is contained/included in Chapter 10 of the textbook and is available in your WileyPlus Volume 2.
Glacier Beverage Company Your partner, Siddig Fleming, has just dropped a mountain of files and other paperwork on your desk and left instruc- tions for you. You notice at the top of the instruction sheet that he has marked the request urgent. As a result, you put your other work aside and begin to sift through the information. Your firm has been a consultant for Glacier Bay Beverage Company (GBB), a publicly traded company located in Torbay, Newfoundland, and founded by James McCarthy. GBB manufactures the famous McCarthy's beverage, Glacier Bay Iced Tea. Your firm has been their consultant for five years. GBB's year end is December 31. You are the brand new lead consultant for GBB. You were not originally assigned to GBB but you were given the task after the original consultant suddenly left for a job in the Caribbean. GBB is currently in the process of a major expansion and it is looking into financing alternatives for the acquisition of manufacturing equipment to be used in its beverage-making facilities. GBB is currently in a cash crunch, although its sales and production have expanded considerably over the past 10 years. All of its other key ratios are in good order, which is allowing GBB to look at a variety of ways to finance its next expansion. The founder and major shareholder, James, is concerned about maintaining a healthy current ratio and debt to equity ratio as he believes this will be important in the future and the minority shareholders have shown some concern over these ratios in the past. In addition, in order to fully understand the situation, GBB would like you to prepare journal entries for the first year for alternatives one, two, and three and the potential impact they will have on GBB's ratios. Your firm has been hired by GBB to assist it in exploring the various alternatives as described in Exhibit I. They would like your detailed analysis. This analysis should incorporate calculations, impact on financial statements, and more qualitative impacts as you deem appropriate in the circumstances (such as impact to corporate structure, overall leverage, advantages, and disadvantages). You have been made aware that the auditors will be arriving in a few months and GBB has asked you to ensure that all accounting recommendations are consistent with GAAP. In addition to the proposed machine acquisition, GBB has a few other accounting items that management would like you to comment on prior to the auditors' arrival (Exhibit II). Required Prepare the draft report to GBB. Exhibit I GBB Details Machine Details Acquisition Arrangement #2 The equipment in question is an ALPHA869Type II Beverage GBB could purchase the asset for $1.5 million and obtain a Bottling Machine capable of bottling 100 cases of iced tea per secured loan from its bank. minute. The fair value of this machine is $1.5 million. The terms of the loan call for principal payments each year The machine is expected to have a useful life of 10 years after beginning January 1, 2020, of $150,000. which it could be sold for $100,000. The interest is to be paid annually each January 1st and is fixed Technological obsolescence is a factor in this type of machine as at 8%, which is consistent with the market rate of this manufacturers are always making them better, stronger, type of loan. and faster. GBB is required to maintain a specified debt to equity ratio or Note: You may assume that the purchase of the equipment and the loan will become immediately payable. the issuance of the debt or equity will take place on January 1, 2020. Acquisition Arrangement #3 Acquisition Arrangement #1 GBB could issue common shares or preferred shares to finance GBB could finance the purchase of the machine by the acquisition of the machinery. issuing bonds. GBB is a public company with the founding member owning $1,000 bonds would be issued totaling $1.5 million, for 51% of the common shares currently outstanding (currently 10 years and a coupon interest rate of 6%. there are 4.5 million shares outstanding in total). The current market rate for similar bonds is 4%. The current market price per share is $15. Interest would be paid semi-annually with the bonds being issued January 1, 2020. Exhibit II Other Details . During the year, a visitor to the facility slipped and fell on some spilled iced tea and broke their leg. They have subsequently sued GBB for $800,000. GBB's lawyers do not believe that the $800,000 lawsuit will be successful, but do believe that there is a 20% chance it will be dismissed, a 60% chance that GBB will have to pay $200,000, and a 20% chance it will have to pay $400,000. GBB intends to put on a contest this year with a coupon attached to each tea product. Any customer who collects five coupons may send them to GBB and redeem them for a GBB T-shirt. GBB would like some guidance on how to account for this. Acquisition Arrangement #1 Bonds 1. Calculates PV of bonds and creates a Bond Amortization Table 2. Provides journal entries for purchase, issuance and all other related entries for 2020 3. Calculates new current and debt/equity ratios and compares to previous ratios 4. Discusses advantages and disadvantages of bond on ratios (addressing all concerns of the users) 5. Discusses the impact on cash constraint 6. Discusses impact to corporate structure and over all leverage Acquisition Arrangement #2 Bank Loan 1. Provides an Instalment Note schedule 2. Prepares joumal entry for purchase, initial loan and all other related entries for 2020 3. Calculates new current and debt/equity ratios and compares to previous ratios 4. Discusses advantages and disadvantages of Long-term Debt on ratios (addressing all concerns of the users) 5. Discusses the impact on cash constraint 6. Discusses impact to corporate structure and over all leverage Acquisition Arrangement # 3 Common Shares 1. Provides journal entries for purchase, issuance and all other related entries for 2020 2. Calculates current and debt/equity ratios and compares to previous ratio 3. Discusses advantages and disadvantages of equity on ratios (addressing all concerns of the users) 4. Discusses the impact on cash constraint 5. Discusses impact to corporate structure and over all leverage Total Common Share Discussion ceinvestigate 3 C Clear Glacier Beverage Company Your partner, Siddig Fleming, has just dropped a mountain of files and other paperwork on your desk and left instruc- tions for you. You notice at the top of the instruction sheet that he has marked the request urgent. As a result, you put your other work aside and begin to sift through the information. Your firm has been a consultant for Glacier Bay Beverage Company (GBB), a publicly traded company located in Torbay, Newfoundland, and founded by James McCarthy. GBB manufactures the famous McCarthy's beverage, Glacier Bay Iced Tea. Your firm has been their consultant for five years. GBB's year end is December 31. You are the brand new lead consultant for GBB. You were not originally assigned to GBB but you were given the task after the original consultant suddenly left for a job in the Caribbean. GBB is currently in the process of a major expansion and it is looking into financing alternatives for the acquisition of manufacturing equipment to be used in its beverage-making facilities. GBB is currently in a cash crunch, although its sales and production have expanded considerably over the past 10 years. All of its other key ratios are in good order, which is allowing GBB to look at a variety of ways to finance its next expansion. The founder and major shareholder, James, is concerned about maintaining a healthy current ratio and debt to equity ratio as he believes this will be important in the future and the minority shareholders have shown some concern over these ratios in the past. In addition, in order to fully understand the situation, GBB would like you to prepare journal entries for the first year for alternatives one, two, and three and the potential impact they will have on GBB's ratios. Your firm has been hired by GBB to assist it in exploring the various alternatives as described in Exhibit I. They would like your detailed analysis. This analysis should incorporate calculations, impact on financial statements, and more qualitative impacts as you deem appropriate in the circumstances (such as impact to corporate structure, overall leverage, advantages, and disadvantages). You have been made aware that the auditors will be arriving in a few months and GBB has asked you to ensure that all accounting recommendations are consistent with GAAP. In addition to the proposed machine acquisition, GBB has a few other accounting items that management would like you to comment on prior to the auditors' arrival (Exhibit II). Required Prepare the draft report to GBB. Exhibit I GBB Details Machine Details Acquisition Arrangement #2 The equipment in question is an ALPHA869Type II Beverage GBB could purchase the asset for $1.5 million and obtain a Bottling Machine capable of bottling 100 cases of iced tea per secured loan from its bank. minute. The fair value of this machine is $1.5 million. The terms of the loan call for principal payments each year The machine is expected to have a useful life of 10 years after beginning January 1, 2020, of $150,000. which it could be sold for $100,000. The interest is to be paid annually each January 1st and is fixed Technological obsolescence is a factor in this type of machine as at 8%, which is consistent with the market rate of this manufacturers are always making them better, stronger, type of loan. and faster. GBB is required to maintain a specified debt to equity ratio or Note: You may assume that the purchase of the equipment and the loan will become immediately payable. the issuance of the debt or equity will take place on January 1, 2020. Acquisition Arrangement #3 Acquisition Arrangement #1 GBB could issue common shares or preferred shares to finance GBB could finance the purchase of the machine by the acquisition of the machinery. issuing bonds. GBB is a public company with the founding member owning $1,000 bonds would be issued totaling $1.5 million, for 51% of the common shares currently outstanding (currently 10 years and a coupon interest rate of 6%. there are 4.5 million shares outstanding in total). The current market rate for similar bonds is 4%. The current market price per share is $15. Interest would be paid semi-annually with the bonds being issued January 1, 2020. Exhibit II Other Details . During the year, a visitor to the facility slipped and fell on some spilled iced tea and broke their leg. They have subsequently sued GBB for $800,000. GBB's lawyers do not believe that the $800,000 lawsuit will be successful, but do believe that there is a 20% chance it will be dismissed, a 60% chance that GBB will have to pay $200,000, and a 20% chance it will have to pay $400,000. GBB intends to put on a contest this year with a coupon attached to each tea product. Any customer who collects five coupons may send them to GBB and redeem them for a GBB T-shirt. GBB would like some guidance on how to account for this. Acquisition Arrangement #1 Bonds 1. Calculates PV of bonds and creates a Bond Amortization Table 2. Provides journal entries for purchase, issuance and all other related entries for 2020 3. Calculates new current and debt/equity ratios and compares to previous ratios 4. Discusses advantages and disadvantages of bond on ratios (addressing all concerns of the users) 5. Discusses the impact on cash constraint 6. Discusses impact to corporate structure and over all leverage Acquisition Arrangement #2 Bank Loan 1. Provides an Instalment Note schedule 2. Prepares joumal entry for purchase, initial loan and all other related entries for 2020 3. Calculates new current and debt/equity ratios and compares to previous ratios 4. Discusses advantages and disadvantages of Long-term Debt on ratios (addressing all concerns of the users) 5. Discusses the impact on cash constraint 6. Discusses impact to corporate structure and over all leverage Acquisition Arrangement # 3 Common Shares 1. Provides journal entries for purchase, issuance and all other related entries for 2020 2. Calculates current and debt/equity ratios and compares to previous ratio 3. Discusses advantages and disadvantages of equity on ratios (addressing all concerns of the users) 4. Discusses the impact on cash constraint 5. Discusses impact to corporate structure and over all leverage Total Common Share Discussion ceinvestigate 3 C Clear
