Question

Cermco produces and sells specialty customer relationship management (CRM) solutions to small and medium-size businesses in the United States and Canada. The company is more than 20 years old and has a steady, loyal customer base. A major reason for Cermco’s success lies in the ability of its product to easily integrate with various accounting and ERP systems. As a result, even when clients upgrade their entire accounting systems to expensive ERP solutions, they continue to use Cermco’s CRM because of its superior features. Discussion Questions Cases 620 Part V Other Forensic Accounting Services Annual revenues for Cermco’s three most recent years are about $11 million (20X3), $7 million (20X4), and $3 million (20X5), respectively. Overall interest expenses and operating margins have remained a relatively constant percentage of revenues. Cermco attributes the decline in revenues to declines in market share as a result of natural client turnover and the entrance of many other small competing software companies into the market. Nevertheless, Cermco’s CRM product continues to enjoy the highest industry ratings and a loyal customer base. Cermco’s balance sheets for the most recent three years follow: CERMCO BALANCE SHEET DECEMBER 31 Thousands 20X5 20X4 20X3 Assets Current assets Cash and cash equivalents $ 390 $1,386 $ 2,603 Short-term investments — — — Net receivables 720 664 1,225 Inventory — — — Other current assets 412 469 892 Total current assets $1,522 $2,519 $ 4,720 Long-term investments 1,215 — — Property, plant, and equipment 76 258 454 Goodwill 545 1,757 2,194 Intangible assets 999 1,844 3,644 Accumulated amortization — — — Other assets — — — Deferred long-term asset charges — — — Total assets $4,357 $6,378 $11,012 Liabilities Current liabilities Accounts payable $ 469 $1,174 $ 1,436 Short/Current long-term debt — — 600 Other current liabilities 1,227 1,358 1,496 Total current liabilities $1,696 $2,532 $ 3,532 Long-term debt — — — Other liabilities — — — Deferred long-term liability charges — — — Minority interest — — — Negative goodwill — — — Total liabilities $1,696 $2,532 $ 3,532 Chapter 19 Business Valuation 621 Produce a valuation estimate for Cermco for December 31, 20X5. Use whatever valuation method you think best but justify your choice. Note that you can estimate the annual income from year-to-year changes in the balance sheet.

Answer 1

Date	Account title	Debit	credit
2017
oct 1	Note receivable	18000
	Accounts receivable		18000
Nov 1	Equipment	48000
	Discount on note payable [49125-48000]	1125
	Note payable		49125
dec 31	Interest receivable	405
	Interest revenue		405
	[being revenue earned for 3 months (1 oct-31dec ) 18000*.09*3/12]
b	Interest expense	250
	Discount on note payable		250
	[Interest accrued for 2 months (1nov -31 dec) 1125*2/9]
2018
feb 1	cash	18540
	Interest receivable		405
	Interest revenue [18000*.09*1/12]		135
	note receivable		18000
	[Being note along with interest accrued collected]
march 31	Interest expense	375
	Discount on note payable		375
	[being interest accrued for 3 months]

JUne 30	Interest expense	375
	Discount on note payable		375
	[[being interest accrued for 3 months[]
Aug 1	Interest expense	125
	Discount on note payable		125
	[being interest accrued for 1 month]
Aug 1	Note payable	49125
	cash		49125