Question

The Wellington Plaza Hotel is located close to the main railway station in a large regional city. Its main client base is business people visiting the city for work-related purposes. The second-largest group of clients consists of groups of (mainly) women visiting the city for its great shopping. All major department stores have a presence in the city and there are a number of specialty shops and factory outlets. Another large group of clients are groups of (mainly) men visiting the city for various sports events, including several important hockey games during the winter. Occupancy rates have been reasonable but stagnant for several years, providing a steady but unsatisfactory rate of return for the owners of the hotel. Revenues have only been sufficient to cover operating costs. In an effort to increase the hotel’s profitability, a major renovation program was undertaken and completed earlier this year. The renovation was predicted to increase the relative attractiveness of the hotel to guests. It was also undertaken to earn additional revenue from the rent of a new coffee shop on the ground floor. The coffee shop is run by a separate company that has purchased a franchise of a major international brand. An economic slow down means business travel is down by 25 percent across the country. Further, discretionary retail spending is down by 40 percent. Several specialty shops in the city have already shut down and others are cutting their opening hours. In addition, the hockey series was won by the local team in four games (instead of the possible seven games). Thousands of visitors left the city early once the final game was over. Just before the hockey games began, the coffee-shop owners went bankrupt and closed down, breaking their lease. The hotel owners are seeking legal advice on whether they can claim penalty fees on the broken lease. Finally, the hotel owners’ bank is warning that the short-term financing obtained for the renovations will not be renewed when it is due (one month after year end). The hotel managers had expected to repay the debt from this year’s bookings and the coffee-shop lease. The hotel owners are still hopeful that the summer will bring a large increase in occupancy (and revenue) as the weather is expected to be nice. This expected summer trade is essential to meet repayments on the long-term debt and to convince the bank to extend the short-term debt. (a) New attempt is in progress. Some of the new entries may impact the last attempt grading.Your answer is incorrect. Which of the following conditions in this case may cast doubt on the client’s ability to continue as a going concern? (There may be more than one correct answer)

A.Economic slowdown

B.Prolonged losses

C.Inability to renew short-term financing when it comes due

D.Supplier reluctance to provide goods on credit

E.Lower occupancy fees due to reduced demand from customers

F.Loss of rent from coffee shop with uncertainty about a new lease

G.Rapid growth with insufficient planning

H.Falling behind competitors

Answer 1

The situation that may cast uncertainty on the client's capacity to endure as a going concern is Failure to refurbish short-term financing when it comes due.

The going concern of a business can be defined as the knack of a business to remain operating without going insolvent over a predictable time in future more than a year. In the above situation, the hotel is not executing and given the point that it wants finances, it requires to borrow in order to endure operating.

Explanation:

If the bank repudiates the hotel the renewal of the short term loan, minus a consistent stream of income it's going to close. The sources of income the competence trusted on are quite erratic; the lease has abruptly been breached by the coffee shop which was in fact detrimental as it was also contending against the Hotel upstairs, the hockey games and the high seasons have been undependable and all the other factors above lead to one thing-borrowing from a financial institution. If the bank doesn't lend the hotel the following quarter it will have to close down.