please answer this

Salad Ltd acquired all the net assets of an existing business, Lettuce Ltd on 1 July 2020. The statements of financial position of the two companies immediately prior to the acquisition were as follows:

All of the assets of Lettuce Ltd are recorded at fair value, with the exception of:

*Fair value excluding Lettuce’s vacant land.

The terms of the acquisition are as follows:

• Salad Ltd is to acquire all of the assets, except cash, delivery trucks and motor vehicles of Lettuce Ltd and will assume all of the liabilities except accounts payable.
• Salad Ltd is to give the share-holders of Lettuce Ltd a block of vacant freehold land, two delivery vehicles and sufficient additional cash to enable the company to pay of the accounts payable and then liquidation costs of $1,600.
• On the liquidation of Lettuce Ltd, the former directors are to receive the land, motor

vehicles and the delivery trucks. The land and vehicles had the following values at 1 July 2020:

Required:

1. Prepare the acquisition analysis in relation to the acquisition.
2. Prepare the journal entries in Salad Ltd to record the business combination.
3. Prepare the statement of financial position of Salad Ltd immediately subsequent to the acquisition.

STEPHENSON REAL ESTATE RECAPITALIZATION Stephenson Real Estate Company was founded 25 years ago by the current CEO, Robert Stephenson. The company purchases real estate, including land and buildings, and rents the property to tenants. The company has shown a profit every year for the past 18 years, and the shareholders are satisfied with the company’s management. Prior to founding Stephenson Real Estate, Robert was the founder and CEO of a failed alpaca farming operation. The resulting bankruptcy made him extremely averse to debt financing. As a result, the company is entirely equity financed, with 8 million shares of common stock outstanding. The stock currently trades at $37.80 per share. Stephenson is evaluating a plan to purchase a huge tract of land in the southeastern United States for $85 million. The land will subsequently be leased to tenant farmers. This purchase is expected to increase Stephenson’s annual pretax earnings by $14.125 million in perpetuity. Jennifer Weyand, the company’s new CFO, has been put in charge of the project. Jennifer has determined that the company’s current cost of capital is 10.2 percent. She feels that the company would be more valuable if it included debt in its capital structure, so she is evaluating whether the company should issue debt to entirely finance the project. Based on some conversations with investment banks, she thinks that the company can issue bonds at par value with a 6 percent coupon rate. From her analysis, she also believes that a capital structure in the range of 70 percent equity/30 percent debt would be optimal. If the company goes beyond 30 percent debt, its bonds would carry a lower rating and a much higher coupon because the possibility of financial distress and the associated costs would rise sharply. Stephenson has a 23 percent corporate tax rate (state and federal).

1. If Stephenson wishes to maximize its total market value, would you recommend that it issue debt or equity to finance the land purchase? Explain.

2. Suppose Stephenson decides to issue debt to finance the purchase. What will the market value of the Stephenson Real Estate Company be if the purchase is financed with debt?

3. What is the price per share of the firm’s stock? (Hint: Stock price per share = Total equity / # of outstanding shares)

Since the reveal of the Cambridge Analytica data privacy scandal in February 2014, Facebook’s share price increased from $60 in February 2014 to around $200 per share in December 2019. During the period, various unfavorable and costly events happened: a few lengthy investigations (internal and external) have been carried out; Facebook CEO Mark Zuckerberg testified before the U.S. Congress in April 2018; Facebook and the U.S. Federal Trade Commission (FTC) agreed to a $5 billion settlement over user privacy violations in July 2019; Facebook were fined by U.K., Spain, and Italy; Facebook revised its privacy policy; etc. However, the scandal did not seem to adversely affect Facebook’s share price over the 5-year period. How do you interpret this observation? What lessons have you learnt from this case about the goal(s) of a company (and its managers)?

Accounting Ethics:

Krispy Kreme Doughnut, Inc. sells donuts through its network of stores owned and operated by independent franchisees. Franchisees criticized Krispy Kreme's former CEO, Scott Livengood, for forcing companies with which Krispy Kreme did business to contribute $500,000 to sponsor a “storytelling festival” in the hometown of Mr. Livengood's wife. According to an independent investigation, this expenditure benefited Mr. Livengood and his wife, but did not provide Krispy Kreme with any marketing or promotional benefits.

1. Was Mr. Livengood's insistence that these companies fund the storytelling festival ethical?
2. Did Mr. Livengood likely have an improper tax motivation for structuring the funding of the storytelling festival in this manner?

Between 2000 and 2012, Gap, Inc. (Gap) ceded its world leadership position in specialty fashion retailing to Inditex of Spain and H&M of Sweden. These two companies, each less than a quarter of Gap’s size in 2000, were now setting the pace in the global mass fashion market, and Gap appeared to be falling ever further behind. In the intervening twelve years, three CEOs had struggled to turn around the fading brand. While several temporary profit boosts appeared to herald a recovery, a sustained rally remained elusive. Mickey Drexler, Gap’s CEO since 1983, who had been responsible for Gap’s rise to global prominence, was fired in 2002 after two years of double digit, same-store sales declines and a 75% drop in the stock price. 1 His successor, Paul Pressler, appeared to have engineered a remarkable recovery, but was fired in 2007 after disappointing sales and another slump in profits. His replacement, Glenn Murphy, fresh from a successful turnaround at a Canadian drug-store chain, promised tighter price controls, lower administrative costs, and a leaner, more aggressive Gap. He cut costs and drove up earnings per share, but sales continued to decline. After four years of troubles, Murphy brought in former J. Crew President, Tracy Gardner, to consult with the Gap brand and he began a bold program to close one fifth of Gap’s North American store base. In 2012, sales had lifted 8%, same-store sales were strongly positive for all of Gap’s domestic sub-brands, and the company’s share price had lifted nearly 50% from the prior year. After 12 years of poor performance, had Glenn Murphy finally discovered the answers to Gap’s problems?  Mickey Drexler: 2000-2002 After Gap, Inc. “misjudged fashion trends in 2000,” its sales growth rate slowed to 18%, below the historical average, and operating profits fell 20% to $1.4 billion.3 CEO Mickey Drexler, was confident that this stumble was a short term problem, but 2001 results suggested otherwise. Sales lifted only 1%, operating profits plunged anther 70% to $426 million and the company made a net loss. 2002 saw sales rise 4% and operating profits recover to $1.0 billion, but comparable stores sales continued to fall. Gap’s stock price decreased from a high of $53.75 in February 2000 to $14 in May 2002.4 Several top designers and senior executives left the company “disillusioned with how bureaucratic the organization had become.” Analysts noted that, while Gap had made “button-down shirts, chinos and basic cotton T-shirts the boomer uniform,” it was struggling to resonate as well with some members of Generation Y (those born in the late 1970s to early 1990s) who were “looking for individuality, not conformity.”6Chairman Don Fisher had had enough. The night before the Gap board meeting on May 22, 2002, Steve Jobs, a board member, called Mickey Drexler to warn him that the board was planning to fire him the next morning. Drexler entered the board meeting aggressively and a board member later described it as “a very emotional scene.”Despite his shock and disappointment, Drexler quickly recovered. In 2003, he became the CEO of J. Crew, a quality basic clothing chain which was incurring heavy losses. Within two years, he had returned it to profitability and, within five, he had more than doubled sales. Paul Pressler: 2002-2007 Paul S. Pressler replaced Drexler as the CEO of Gap, Inc. Pressler had spent 15 years with The Walt Disney Company and ended his tenure there as the chairman of Walt Disney Parks and Resorts. The press noted the difference in the two men’s leadership styles: whereas Drexler “flew by the seat of his khakis,” relying on his honed intuition to direct apparel development, Pressler was researchoriented and left decisions about apparel to Gap, Inc.’s designers. 8 Pressler stated, “I had to demonstrate to everyone that the general manager is here to lead the people—not pick the buttons.”9 Pressler moved quickly to close 200 underperforming stores, slow the rate of new openings, and reduce excess inventory, 10 resulting in a “spectacular turnaround” in 2003. 11 Between 2002 and 2003, operating profits rose 87% to $1.8 billion, marginally beating the all-time record set in 1999. Gap Brand Pressler hired Canadian Pina Ferlisi as executive vice president of product design in March 2003 to define the division’s style aesthetic. Before joining Gap, Inc., Ferlisi worked at Perry Ellis, Tommy Hilfiger, and Theory; she also helped launch the successful Marc by Marc Jacobs line. Her Gap design team was located in New York City and included Vice President of Women’s Design Louise Trotter, who formerly worked at Calvin Klein, and Vice President of Accessories Design Emma Hill, who previously held a similar post at Marc Jacobs. Both Trotter and Hill hailed from the U.K. Scores of consumer and employee insights indicated that female Gap customers felt that the brand’s offerings were too androgynous and boxy. Hence, Ferlisi made the women’s lines more feminine and focused on fabric and fit. Banana Republic For years, Banana Republic had a reputation of being “a purveyor of chic basics—casual office wear in black or beige”27—i.e., an upscale Gap. However, under the direction of President Marka Hansen, the division focused on making its product assortment more fashionable and trendy, minimizing the overlap between Gap and Banana, and catering to 25- to 30-year-old professionals . Hansen explained, “What’s the hook or differentiation? . . . It’s an affordable, covetable luxury . . . . We’re bringing fashion to a wider audience. Old Navy Under President Jenny Ming, Old Navy continued its focus on families, rolling out underwear, maternity, and infant lines to raise margins.32 The division expanded to Canada in Pressler’s first year as CEO and it targeted Hispanics with its first Spanish television spot at the end of 2003. The company’s localization strategy was tested in select Old Navy stores in 2004, and the company planned to extend the program to all Old Navy outlets in 2005. Forth & Towne Gap, Inc. established five test stores for Forth & Towne in Chicago and New York by fall 2005. Under Gary Muto’s leadership, the firm positioned Forth & Towne to appeal to women aged 35– 50. Gap Online Toby Lenk, a 1987 Harvard MBA, headed the company’s online division, Gap, Inc. Direct. In 2004, Gap, Inc. was the largest U.S. online apparel retailer with sales of over $500 million. It was “redesign[ing] and rebuild[ing] all of [its] websites from the ground up” to enhance visitors’ online shopping and to improve online and in-store integration.47 Lenk noted that 35% of the company’s Web site visitors were pre-shoppers preparing for store visits, and 13% of those who entered a Gap, Inc. store had visited the store’s online site beforehand. The firm’s new e-commerce platform would allow the sites to take back orders and preorders. Lenk explained, “This means we will never have to walk a sale on a basic item, and at the same time it will allow us to run our basic inventory much tighter.”48 The company planned to have most of the Web site enhancements completed by the 2005 holiday season. Marketing Along with reworking Gap’s main brands, Pressler also overhauled Gap’s public image and publically positioned its divisions as lifestyle brands. The CEO remarked, “We need to bring more theatrics, storytelling and consistency [to retail]. If you can’t tell me what a Gap dinner party, Banana Republic car or Old Navy vacation looks like, then we haven’t built our stories.”49 Pressler had also been focused on differentiating the brands and “upgrading the marketing functions at all of Gap’s brands, including the hires of new head marketers at all three units.”50 Recent Gap-brand TV advertising featured actors and singers. The company paid 40-year-old actress Sarah Jessica Parker, former Sex and the City star, $38 million to appear in television and print ads for three seasons during 2004–2005. It replaced Parker with 17-year-old British soul singer Joss Stone as its Gap spokes-model in the summer of 2005.51 In an effort to tout its “vastly expanded variety of fits” in jeans, the company planned to use more nontraditional types of advertising—i.e., “guerrilla marketing and grassroots tactics,” according to Jeff Jones, executive vice president of marketing at Gap. After lackluster results in 2005 and six consecutive quarters of declining same-store sales, Pressler pointed to 2006 as a key year to prove Gap’s recovery and justify his rebranding efforts.60 Pressler noted, “We are acting with a tremendous sense of urgency to win back customers.”61 Pressler also increased the annual cash dividend 78% for 2006 and the board authorized a further $500 million for a share repurchase program, $250 of which would be repurchased in Q1 and Q2 of 2006. Fisher: Interim CEO, 2007 Although Fisher was interim CEO for less than a year, he made a number of moves that undid much of Pressler’s previous work. Less than a week after firing Pressler, he cut many of Pressler’s hires from Disney. Cynthia Harriss, the president of Gap U.S., was replaced by Marka Hansen, the previous president of Banana Republic and an employee since 1987. Fisher also closed all Forth & Towne stores by the end of June, taking a pretax charge of $40 million.67 Although Forth & Towne has been open since 2005, financials were never disclosed for the brand. Fisher also began to reduce Gap’s workforce to bring down expenses, cutting a “relatively small percentage” of the 150,000 workers. Glenn Murphy: 2007-2012 On July 26, 2007, Gap appointed Glen Murphy, as the new CEO. Since 2001, he had been the CEO of Shoppers Drug Mart, a Canadian drugstore chain. Murphy’s first major move as CEO was to cut expenses and control inventory discounting. Quarter three profit for 2007 lifted 26% due to lower marketing spending and better product margins. In 2008, Spain’s Inditex overtook Gap, Inc. as the world’s largest specialty apparel retailer, reaching $3.3 billion in sales for the first quarter of 2008 compared to Gap’s $3.25 billion.86 With over 200 designers and rapid supply chains that could produce and stock hot items within weeks. Problems returned in 2011. Sales remained steady at $14.5 billion, but operating profits fell 27% to $1.4 billion. Murphy hired former J. Crew President, Tracy Gardner, to consult with the Gap brand. Gap announced plans to shut more than one fifth of its North American stores over the next two years and aimed to shrink the U.S. store base to 700 by the end of 2013.91 Murphy noted that China was Gap’s biggest market for further growth. However, by the end of 2012, Murphy’s strategy appeared to be working. Sales lifted 8% to $15.6 billion, a six-year high, and operating profit recovered to $1.9 billion. Store closings lifted sales per store in the North American Gap to $3.7 million (from a low of $3.3 million in 2009) and comparable store sales were strongly positive for all of Gap’s North American divisions. Gap had also made significant steps toward streamlining its production and engaging more closely with trending fashions. By 2012, Gap had cut its lead time from more than nine months in the early 2000s to less than four months for key items.96 Across all lines, production time had been cut by nearly one third. 97 In January Gap acquired Intermix Inc. for $130 million, which promised expansion into the luxury market as well as greater access to of-the-moment fashion pieces. Although Intermix didn’t manufacture its own clothing, it has established relationships with a variety of high street designers. What else could Murphy do to restore Gap’s leading position in fashion retailing? Would Murphy’s international and online focus be enough to sustain this turnaround?

-----------------------------------------------------------------------------------------------------------------------------------

What is the case about?

What are the important events that occurred in the case?

What can we learn from reading the case?

What advice do you have for the leaders in the case and/or company in the case?

The following account balances are for the Agee Company as of January 1, 2017, and December 31, 2017. All amounts are denominated in kroner (Kr).

Additional Information

• Agee issued additional shares of common stock during the year on April 1, 2017. Common stock at January 1, 2017, was sold at the start of operations in 2010.

• Agee purchased buildings in 2011 and sold one building with a book value of Kr 17,500 on July 1 of the current year.

• Equipment was acquired on April 1, 2017.

Relevant exchange rates for 1 Kr were as follows:

1. Assuming the U.S. dollar is the functional currency, what is the remeasurement gain or loss for 2017? The December 31, 2016, U.S. dollar-translated balance sheet reported retained earnings of $145,200, which included a remeasurement loss of $28,300.

2. Assuming the foreign currency is the functional currency, what is the translation adjustment for 2017? The December 31, 2016, U.S. dollar-translated balance sheet reported retained earnings of $162,250, and a cumulative translation adjustment of $9,650 (credit balance).

The following account balances are for the Agee Company as of January 1, 2017, and December 31, 2017. All amounts are denominated in kroner (Kr).

Additional Information

• Agee issued additional shares of common stock during the year on April 1, 2017. Common stock at January 1, 2017, was sold at the start of operations in 2010.

• Agee purchased buildings in 2011 and sold one building with a book value of Kr 17,500 on July 1 of the current year.

• Equipment was acquired on April 1, 2017.

Relevant exchange rates for 1 Kr were as follows:

1. Assuming the U.S. dollar is the functional currency, what is the remeasurement gain or loss for 2017? The December 31, 2016, U.S. dollar-translated balance sheet reported retained earnings of $145,200, which included a remeasurement loss of $28,300.

2. Assuming the foreign currency is the functional currency, what is the translation adjustment for 2017? The December 31, 2016, U.S. dollar-translated balance sheet reported retained earnings of $162,250, and a cumulative translation adjustment of $9,650 (credit balance).