You, C P A, work for C o n r a d Ltd. It is now May 12, 2015, and your boss, Marion Conrad, has just returned from meeting with a client and calls you into her office to review the work they require. "I have just met with George and Kelly of Modern Industries Ltd. (MIL)," Marion starts. "MIL manufactures and retails wooden picture frames. The company was incorporated in 1997 by George and was joined in 2007 by his daughter Kelly. George currently owns 70% of the company and Kelly owns 30%. George is looking forward to retiring soon and together he and Kelly have been formulating a plan for the redemption of his shares. George's shares are worth $4 million and he would like to redeem 50% of these within the next year, with the remainder redeemed in 3-5 years' time, depending on the company's cash flows." The draft financial statements of MIL are provided in Appendices I and II. "George has been looking at ways to finance the redemption. He has been in discussions with the bank as the company's line of credit is currently up for renewal. The bank has not yet seen the 2015 draft statements, but has been asking for them. Provided their financials are still in line with the industry, the bank has offered to renew the existing line of credit (with the same terms and conditions) or offer two new types of loans to replace the current line of credit facility. The line of credit does have a large amount of available credit, however, George dislikes the personal guarantees and is wondering about the value in the property, that is not reflected in the financial statements, being used as collateral in place of personal guarantees. The bank proposals, as well as an additional option George has provided information on, are included in Appendix III. "I have also reviewed the financial statements and gathered information on industry standards (Appendix IV)," Marion continues. "As the bank will be looking to analyze MIL's financial situation, particularly in comparison to competitors, please prepare a vertical analysis and relevant ratio analysis for 2014 and 2015. You should include in your memo explanations and recommendations based on these analyses, supported by dollar values where possible. Additionally, if there are ways that MIL can improve their working capital management and their financial statements in general in order to improve their financing potential, this would be advantageous. "Finally, I would also like you to analyze the current financing proposals. Be sure to consider the impact of each of these proposals on the financial statements and make a recommendation on which proposal to accept. Please prepare a draft memo to the Modern with the results of your analysis."

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You, CPA, work for Conrad Ltd. It is now May 12, 2015, and your boss, Marion Conrad, has just returned from meeting with a client and calls you into her office to review the work they require. \"I have just met with George and Kelly of Modern Industries Ltd. (MIL),\" Marion starts. \"MIL manufactures and retails wooden picture frames. The company was incorporated in 1997 by George and was joined in 2007 by his daughter Kelly. George currently owns 70% of the company and Kelly owns 30%. George is looking forward to retiring soon and together he and Kelly have been formulating a plan for the redemption of his shares. George's shares are worth $4 million and he would like to redeem 50% of these within the next year, with the remainder redeemed in 3-5 years' time, depending on the company's cash flows.\" The draft financial statements of MIL are provided in Appendices I and II. \"George has been looking at ways to finance the redemption. He has been in discussions with the bank as the company's line of credit is currently up for renewal. The bank has not yet seen the 2015 draft statements, but has been asking for them. Provided their financials are still in line with the industry, the bank has offered to renew the existing line of credit (with the same terms and conditions) or offer two new types of loans to replace the current line of credit facility. The line of credit does have a large amount of available credit, however, George dislikes the personal guarantees and is wondering about the value in the property, that is not reflected in the financial statements, being used as collateral in place of personal guarantees. The bank proposals, as well as an additional option George has provided information on, are included in Appendix III. \"I have also reviewed the financial statements and gathered information on industry standards (Appendix IV),\" Marion continues. \"As the bank will be looking to analyze MIL's financial situation, particularly in comparison to competitors, please prepare a vertical analysis and relevant ratio analysis for 2014 and 2015. You should include in your memo explanations and recommendations based on these analyses, supported by dollar values where possible. Additionally, if there are ways that MIL can improve their working capital management and their financial statements in general in order to improve their financing potential, this would be advantageous. \"Finally, I would also like you to analyze the current financing proposals. Be sure to consider the impact of each of these proposals on the financial statements and make a recommendation on which proposal to accept. Please prepare a draft memo to the Modern with the results of your analysis.\" Your response, not including Excel (if applicable), should not exceed 1,800 words. Appendix I Appendix II Appendix III Financing Proposals 1. Line of Credit The company has a line of credit from the bank that has a general security over all of the assets of the company along with the shareholders' personal guarantees. The total maximum amount available on this line of credit is $6,000,000. The loan bears interest at prime plus 3% and is up for renewal in June 2015. The prime bank lending rate is currently 3%. 2. Asset-based lending The bank has offered to provide an asset-based loan that would be secured on the receivables only. The bank will provide up to 80% of the balance of receivables that are 60 days or less. The interest charged will be prime plus 4%. This asset-based loan will replace the existing line of credit. The bank will monitor the receivables on a monthly basis, and the limit of the advance will fluctuate depending on the receivable balance. 3. Five-year term loan The bank is also prepared to offer a long-term loan secured by the company's property, plant and equipment for up to $4 million. The term loan would be for five years and bear interest at 6%. Interest only is payable monthly, with the principal due at maturity in June 2020. 4. Strategic partner - Charles Wong MIL currently purchases 75% of its wood materials from Original Woods Inc.(OWI). OWI, owned by Charles Wong, has sold wood to MIL since 1997 and George and Charles have become very good friends during this time. Charles has always been interested in investing in MIL and has approached George with a proposal. Charles would like to become a strategic partner in MIL. In return for 35% ownership in the company, Charles Wong will pay $2,000,000 and OWI would sell wood materials to MIL at a discount of 10% from current costs paid by MIL. Using the 2015 costs, this would approximate annual savings in cost of sales of $1,200,000. In return, Charles would be involved in the company as an executive manager and have a seat on the board of directors. Appendix IV Industry Standards and notes on MIL's accounting practices 4. MIL has always used declining balance method for depreciation on its property, plant and equipment in order to be consistent with the CCA claims for tax purposes. In 2015, depreciation totalled $1,613,000 (allocated between cost of sales and facilities). Competitors in the industry primarily use the straight-line method for depreciating assets over their useful lives. Kelly also mentioned that assets are used evenly over their lives and that, historically, when the company has sold assets, the proceeds received have been significantly higher than their book values. Based on discussions, Marion determined that if straight-line depreciation had been used instead of declining balance, depreciation for 2015 would have been $1,075,000. The estimated fair market value of these assets is $12,000,000, of which $2,000,000 relates to the retail operations