!!! Zo 56 INTRODUCTORY CASES a 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 IT). Required Prepare the draft report to GBB. Exhibiti 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 faster 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 ar 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 #1 . GBB could finance the purchase of the machine by issuing bonds $1,000 bonds would be issued totaling S1.5 million, for 10 years and a coupon interest rate of 6% The current market rate for similar bonds is 4%. Interest would be paid semi-annually with the bonds being issued January 1, 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 million shares outstanding in total). The current market price per share is $15. $ 8 !!! Zo 56 INTRODUCTORY CASES a 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 IT). Required Prepare the draft report to GBB. Exhibiti 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 faster 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 ar 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 #1 . GBB could finance the purchase of the machine by issuing bonds $1,000 bonds would be issued totaling S1.5 million, for 10 years and a coupon interest rate of 6% The current market rate for similar bonds is 4%. Interest would be paid semi-annually with the bonds being issued January 1, 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 million shares outstanding in total). The current market price per share is $15. $ 8