Northern Escape Resorts (NER) is a private corporation that owns three luxury boutique hotels that are located in Niagara-on-the-Lake, Toronto, and Ottawa. The largest hotel, The Skyline Inn and Spa, is located in an upscale area of Toronto and has 200 guest rooms, a high-end restaurant, and features a full-service luxury spa. NER’s other hotels, The Capital in Ottawa, and The Vineyard in Niagara-on-the-Lake, both have 75 guest rooms, an on-site restaurant and an indoor pool and exercise facilities. None of the hotels have a golf course.

It is now June 20, 2020. You, CA, are the assistant to Melissa Connell, who is the corporate controller of NER.

This week, Melissa asks you to help her to prepare for the upcoming Board of Directors (the Board) meeting. The Board meets on a quarterly basis to review the performance of NER. For each Board meeting the accounting department prepares NER’s quarterly statement of net income. Melissa is present at the Board meetings for the discussion of financial issues. The Board is not provided with any other documentation or financial information.

Melissa informs you that the Board will be discussing the potential outsourcing of the company’s information processing system at the upcoming meeting and she wants you to prepare a memo that describes the concerns with the current system and an assessment of the proposed outsourced system. She provides you with her notes on the current and proposed outsourced systems (Exhibit I). Another topic for discussion at this meeting is the potential acquisition of a hotel, Huntsville Heights Inc. (Huntsville Heights). Melissa provides you with her notes pertaining to this potential acquisition (Exhibit II) and excerpts from the financial statements of Huntsville Heights (Exhibit III). She asks you to use this information and prepare an analysis of this potential acquisition. Melissa also wants to improve the financial information that is provided to the Board and has asked you to provide suggestions for her consideration.

Required: Prepare the memo to Melissa Connell responding to her requests.

HghTech: The Current System

NER is currently using HghTech, a formerly popular management information system. Users now find the system capabilities to be limited and the transaction processing to be slow.

Bobby Gilbate, the company’s former information system manager, retired in January 2020 after 10 years with NER. Instead of replacing him, NER management allocated his duties to existing NER staff. Melissa is responsible for the general ledger and accounting modules. Melissa has the expertise needed to be able to back up the system, to perform required upgrades, and to correct program coding and perform these functions when necessary.

Five years ago, NER introduced an online booking system whereby potential hotel guests can access the company’s reservation system (which is housed on NER’s server), determine room availability and make reservations for their stay.

NER stores personal information about its clients, including addresses, telephone numbers, e-mail addresses, credit card information, and travel preferences. This information is used to help personalize customer service and to minimize transaction times for returning guests. This information is stored on NER’s only server, which is located at NER’s head office in Toronto, and is accessible by all users of the system.

Each month NER purchases a large quantity of supplies for its hotels. Suppliers’ invoices are directed to the accounts payable department and two of the three accounts payable employees are authorized to pay these invoices. Cheques are issued to suppliers on a weekly basis. In recent months, NER has received an increasing number of complaints from suppliers about receiving incorrect payments and unpaid invoices.

Travel Systems: The Proposed Outsourced System

Travel Systems (TS) is a well-known information service provider located in San Jose, California, and has worked with many prominent hotel chains in the United States. TS offers a complete information system outsourcing package to its clients. Clients use the system to record all transactions (e.g., revenues, expenses, inventory, etc.). Data is processed, stored, and communicated using TS’s system. Data is transferred to TS’s servers using a dedicated secure line. TS offers a number of different (daily, weekly, monthly) reporting packages and, if requested to do so, TS will report on key hotel performance indicators such as occupancy rates, average length of stay, room cancellation statistics, and future reservation information.

Exhibit II

Controller’s Notes Pertaining To The Potential Acquisition Of The Huntsville Heights Hotel

Background Information

NER is interested in purchasing a hotel property located in Muskoka, Ontario, Huntsville Heights Beach and Golf Resort Inc. (Huntsville Heights). Bill and Betty Gettysburg privately own this hotel property. Their asking price is $14 million for all of the shares of Huntsville Heights.

Huntsville Heights is an extremely popular destination for Canadian and international travelers. The hotel is usually fully booked from June through October. Guests usually make reservations months in advance of their stay. During the peak season for 2019, the average room was $175 per night. During the off-peak season, the hotel is not usually fully booked. However, for the month of April 2019 the hotel was fully booked because of special events which resulted in $50,000 more revenue than normally earned.

Muscle Wedding

In June 2019, Huntsville Heights hosted the wedding and wedding reception of the daughter of a well-known actor, Martin Muscle. Muscle booked every room in the hotel for three nights which provided Huntsville Heights with revenue of $210,000. Muscle also paid a $200,000 fee to have the hotel close its golf course and hotel facilities to the public for the three day period which extended over a weekend. The golf course and pro shop would otherwise have generated revenue in the amount of $90,000. The Gettysburg’s were surprised to receive an additional $500,000 payment from Muscle to thank them for their successful efforts in keeping the wedding details private. All of the amounts received for this wedding are included in reservation revenue on the income statement.

Golf Tournament

Huntsville Heights hosted a high profile, national tournament for golfers in May 2019 and the fee received by Huntsville Heights for hosting this tournament was $750,000. Huntsville Heights had to close the golf course to the public for seven days which resulted in lost revenue of $170,000. Each year, the tournament organizers seek out a different site to host the tournament. Several elite Canadian golf courses have hosted this tournament. To facilitate player and supporter accommodations, the golf courses for this tournament are usually affiliated with a large resort hotel, such as Huntsville Heights. With its 400 guest rooms and its quality golf course, Huntsville Heights met the requirements of the tournament organizers. The fee is included in golf fees and pro shop revenue on the income statement.

Personal Expenses

The Gettysburgs use Huntsville Heights to pay their personal expenses rather than taking a salary. During fiscal 2019, personal expenses paid by Huntsville Heights include:

The purchase of a new sports car for Betty that cost $100,000,

Travel costs in the amount of $225,000 to various exclusive resorts in Hawaii, Tahiti and South Africa during the winter months of 2019. Bill claims that is the best way to research new trends in the industry, and

An additional $420,000 in other personal expenses.
These expenditures are included in “hotel operating costs” on the income statement.

As the Gettysburgs use the funds freely for personal use, they do not pay themselves a

regular salary.

Land and Investments

Huntsville Heights purchased 300 acres of land at a cost of $1,000,000. Huntsville Heights was built on 200 acres of this land. The separate 100 acre parcel of land is undeveloped. The undeveloped land, which is located 40 kilometers from Huntsville Heights is estimated to be presently worth $3,000,000.

The special payment of $500,000 received by Huntsville Heights from Martin Muscle along with $500,000 of additional funds was invested in July 2019 in interest-bearing and equity investments. These investments have earned $25,000 in interest and dividends which are included in investment revenue on the income statement. The market values of the investments are unchanged from their costs as at December 31, 2019.

Valuation

As the 2019 annual net income is likely to be representative of future earnings, and the resort is not a capital intensive business, NER would like to value the company using a capitalized earnings approach. Melissa recently read in a trade journal that similar property investments yield a 20% return. She does not see any reason why this investment in Huntsville Heights would be any different.

EXHIBIT III

Huntsville Heights Beach And Golf Resort Inc. Excerpts From The Balance Sheet

As at December 31 (in thousands of dollars)

2019 (unaudited)

2018 (unaudited)

Assets

Cash

$ 453

$ 162

Accounts receivable

142

130

Inventory

270

140

Prepaid expenses

12

3

877

435

Property, plant and equipment (net)

16,657

15,465

Investments

1,000

-

17,657

15,465

$18,534

$15,900

Liabilities

Bank operating loan

$ 90

$ 100

Accounts payable and accrued liabilities

225

166

315

266

Long-term debt

160

200

475

466

Shareholders’ Equity

Common shares

100

100

Retained earnings

17,959

15,334

18,059

15,434

$18,534

$15,900

2019 (unaudited)

2018 (unaudited)

Revenues

Reservations

$16,710

$14,300

Golf fees and pro shop

6,060

4,485

Investment income

25

-

Total revenue

22,795

18,785

Expenses

Hotel operations, including amortization

10,670

8,870

Golf course operations, including amortization

995

810

Wages and salaries

7,200

6,675

Total expenses

18,865

16,355

Income before income tax

3,930

2,430

Income tax

1,305

780

Net income

$2,625

$1,650