Only do Acquisition Arrangement #3 (Common Shares)

Only do Acquisition Arrangement #3 (Common Shares)

INTRODUCTORY CASES 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 loed 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 lask 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 te le used in its beverage-making facilities. GBB is currently in a cash crunch, although its sales and preluction have expanded considerably over the past To 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 lulune and the mitotily shareholders have shown some concern Over these raties 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 ralios. Your firm has been hired by GBB to assist it in explaing Le various alternatives as described in Exhibit l. They would like your detailed anal alysis should ingedale valeulations, impact on financial statements, and are alkaline tiate in the circunstances such an impact to cooperate suulule:everalli You have been made Elie dues all the rising in a few months and CBS has asked you to cosure that Isted with Anak Lelle proposed machine squisition. BB luas mentos por to the auditors amsal (II) Financial Accounting Cases (ACC2209) Required Prepare the draft report to GBB. GBB Details Machine Details The equipment in question is an ALPHA8K9 Type II Beverage Bottling Machine capable of bottling 100 cases of iced tea per minute. The fair value of this machine is $1.5 million The machine is expected to have a useful life of 10 years after which it could be sold for $100,000. Technological obsolescence is a factor in this type of machine as manufacturers are always making them better, stronger. and fastet. Note: You may assume that the purchase of the equipment and the issuance of the debt or equity will take place on January 1, 2020. Acquisition Arrangement #2 GBB could purchase the asset for $1.5 million and obtain a secured loan from its bank. The terms of the loan call for principal payments each year beginning January 1, 2020, of $150,000. The interest is to be paid annually each January Ist and is fixed al 8% which is consistent with the market rate of this type of loan - GBB is required to maintain a specified debt to equity ratio or the loan will become immediately payable. Acquisition Arrangement et GBB could finance the purchase of the machine by 199ting bonds SI 000 hords would be issued tataling $1.5 million, Tor years and a coupon interest rate of 6. The current market rate for similar bonds is! Interest wesulu he puid seni annually widi the bonus hely issued januar 2020. Acquisition Arrangement 3 GBB could issue common shares or preferred shares to finance the acquisition of the machinery - GBB is a public company with the founding member owning 51 of the common shares currently outstanding currently there are 4.5 arillion shares outstanding in total) - The current market price per share is $15. 8 Glacier Beverage Company 57 Exhibit 17 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 $800,0XXO 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. 9 Section II. Introductory Cases INTRODUCTORY CASES 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 loed 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 lask 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 te le used in its beverage-making facilities. GBB is currently in a cash crunch, although its sales and preluction have expanded considerably over the past To 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 lulune and the mitotily shareholders have shown some concern Over these raties 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 ralios. Your firm has been hired by GBB to assist it in explaing Le various alternatives as described in Exhibit l. They would like your detailed anal alysis should ingedale valeulations, impact on financial statements, and are alkaline tiate in the circunstances such an impact to cooperate suulule:everalli You have been made Elie dues all the rising in a few months and CBS has asked you to cosure that Isted with Anak Lelle proposed machine squisition. BB luas mentos por to the auditors amsal (II) Financial Accounting Cases (ACC2209) Required Prepare the draft report to GBB. GBB Details Machine Details The equipment in question is an ALPHA8K9 Type II Beverage Bottling Machine capable of bottling 100 cases of iced tea per minute. The fair value of this machine is $1.5 million The machine is expected to have a useful life of 10 years after which it could be sold for $100,000. Technological obsolescence is a factor in this type of machine as manufacturers are always making them better, stronger. and fastet. Note: You may assume that the purchase of the equipment and the issuance of the debt or equity will take place on January 1, 2020. Acquisition Arrangement #2 GBB could purchase the asset for $1.5 million and obtain a secured loan from its bank. The terms of the loan call for principal payments each year beginning January 1, 2020, of $150,000. The interest is to be paid annually each January Ist and is fixed al 8% which is consistent with the market rate of this type of loan - GBB is required to maintain a specified debt to equity ratio or the loan will become immediately payable. Acquisition Arrangement et GBB could finance the purchase of the machine by 199ting bonds SI 000 hords would be issued tataling $1.5 million, Tor years and a coupon interest rate of 6. The current market rate for similar bonds is! Interest wesulu he puid seni annually widi the bonus hely issued januar 2020. Acquisition Arrangement 3 GBB could issue common shares or preferred shares to finance the acquisition of the machinery - GBB is a public company with the founding member owning 51 of the common shares currently outstanding currently there are 4.5 arillion shares outstanding in total) - The current market price per share is $15. 8 Glacier Beverage Company 57 Exhibit 17 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 $800,0XXO 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. 9 Section II. Introductory Cases