(Effect of accounting on business decisions, LO 6, 9) Judge Ltd. (Judge) operates a small chain of auto supply shops. The company has been in business for many years and for most of that time it was owned and operated by the Judge family. In recent years Judge has been in financial difficulty and management has been turned over to a team of professional managers. The managers own 10% of the shares of Judge. The Judge family owns the remainder of the shares. As result of the financial difficulties, Judge agreed to a number of strict accounting-based covenants with its creditors, including a requirement that Judge’s debt-to-equity ratio not go above 1.5:1 at the end of any quarter over the term of either its bank loan or its long-term debt. If the covenant is violated, all loans become payable in full in 30 days.

Judge owns a piece of land and a building that it has not used for four years. The building housed the first of Judge’s shops, but it is no longer appropriate for use. The building is in very poor condition and is not in a very good part of town. Judge has not been able to find a tenant or a buyer, even though it has been looking for both for over two years. The land and building have a NBV of $1,685,000. Judge Ltd. has received an offer of $1,000,000 for the land and building. The offer is attractive, especially because it would provide some urgently needed cash. The offer expires on June 30, 2005, the last day of Judge’s fiscal year, and it appears unlikely that it will be renewed.

It is now June 27, 2005. Judge’s management estimates that net income for the year will be about $225,000. Management also projects that on June 30, 2005 current liabilities will be $575,000 and long-term debt will be $1,675,000. Capital stock on June 30, 2005 will be $800,000 and retained earnings on June 30, 2004 were $725,000.

You have been asked by Judge’s president to prepare a report discussing all the business and accounting issues relevant to the land and building.

Required:

Prepare the report requested by Judge’s president.