Bellrome Company is planning to replace an old machine with the following related information:
Book value P300,000
Remaining useful life 5 years
Current market value 150,000

Additional information:
 The replacement machine can be acquired at a list price of P500,000. A 5% cash discount is
available if the said machine is paid within 30 days from acquisition date. Freight and installation
costs is estimated at P75,000.
 Should the company decide not to acquire the new machine, it needs to repair the old one at a cost
of P50,000. Otherwise, additional cost of removing the old unit is estimated at P10,000.
 Additional gross working capital of P15,000 will be needed to support operation planned with the
new equipment.
 The new machine is estimated to reduce cash operating costs amounting to P150,000 per year
and is to be depreciated using the straight-line method over its useful life of 5 years.
 Bellrome is subject to a 30% income tax rate.

REQUIREMENTS:
a. What is the net initial cost of investment to be used in decision making?
b. What is the increase in annual net income?
c. What is the increase in annual net cash flows if the company replaces the machine?

SawPro Company, owned and operated by Heather Moore, opened for business in 2015. The company sells a single model of commercial grade chain saws that it purchases from the manufacturer. Heather’s customers, primarily businesses offering landscaping and tree-services, purchase saws on account, with payment typically due within thirty-days.  

The following transactions occurred during the calendar year ending December 31, 2018:

1. Acquired equipment that automated sharpening chain saw blades. Instead of paying cash, Heather signed an agreement with a lease financing company. The equipment was delivered, installed, and ready for service on March 1, 2018. Terms of the lease require twenty-four equal monthly payments of $270, with the first payment due at signing on March 1st. The annual rate is 4.75 percent. Heather made all payments on the dates required. The fair value of the equipment is $6,500 with an expected service life of thirty months. Heather has the option to purchase the equipment for $250 at the end of the lease term; she expects to exercise that option. (Note: use the old rule percent’s to determine whether the lease is financing or operating).

Post a journal entry of this transaction!

Siemens’ Simple Structure–Not

There is perhaps no tougher task for an executive than to restructure a European organization. Ask former Siemens CEO Klaus Kleinfeld.

Siemens, with 77 billion Euros in revenue in 2008, some 427,000 employees, and branches in 190 countries, is one of the largest electronics companies in the world. Although the company has long been respected for its engineering prowess, it’s also derided for its sluggishness and mechanistic structure. So when Kleinfeld took over as CEO, he sought to restructure the company along the lines of what Jack Welch did at General Electric. He has tried to make the structure less bureaucratic so decisions are made more quickly. He spun off underperforming businesses. And he simplified the company’s structure.

Kleinfeld’s efforts drew angry protests from employee groups, with constant picket lines outside his corporate offices. One of the challenges of transforming European organizations is the customary active participation of employees in executive decisions. Half the seats on the Seimens board of directors are allocated to labor representatives. Not surprisingly, the labor groups did not react positively to Kleinfeld’s GE-like restructuring efforts. In his efforts to speed those efforts, labor groups alleged, Kleinfeld secretly bankrolled a business-friendly workers’ group to try to undermine Germany’s main industrial union.

Due to this and other allegations, Kleinfeld was forced out in June 2007 and replaced by Peter Löscher. Löscher has found the same tensions between inertia and the need for restructuring. Only a month after becoming CEO, Löscher was faced with a decision whether to spin off the firm’s underperforming 10 billion-Euro auto parts unit, VDO. He had to weigh the forces for stability, which want to protect worker interests, against U.S.-style pressures for financial performance. One of VDO’s possible buyers is a U.S. company, TRW, the controlling interest of which is held by Blackstone, a U.S. private equity firm. German labor representatives have derided such private equity firms as “locusts.” When Löscher decided to sell VDO to German tire giant Continental Corporation, Continental promptly began to downsize and restructure the unit’s operations.

Löscher has continued to restructure Siemens. In mid- 2008, he announced elimination of nearly 17,000 jobs worldwide. He also announced plans to consolidate more business units and reorganize the company’s operations geographically. “The speed at which business is changing worldwide has increased considerably, and we’re orienting Siemens accordingly,” Löscher said.

Since the switch from Kleinfeld to Löscher, Siemens has experienced its ups and downs. Since 2008, its stock price has fallen 26 percent on the European stock exchange and is down 31 percent on the New York Stock Exchange. That is better than some competitors, such as France’s Alcatel-Lucent (down 83 percent) and General Electric (down 69 percent), and worse than others, such as IBM (up 8 percent) and the Swiss/Swedish conglomerate ABB (down 15 percent).

Though Löscher’s restructuring efforts have generated far less controversy than Kleinfeld’s, that doesn’t mean they went over well with all constituents. Of the 2008 job cuts, Werner Neugebauer, regional director for a union representing many Siemens employees, said, “The planned job cuts are incomprehensible nor acceptable for these reasons, and in this extent, completely exaggerated.”

When asked by a reporter whether the cuts would be controversial, Löscher retorted, “I couldn’t care less how it’s portrayed.” He paused a moment, then added, ““Maybe that’s the wrong term. I do care.”

Questions. ANSWERS SHOULD BE 1500 WORDS

1. What do Kleinfeld’s efforts at Siemens tell you about the difficulties of restructuring organizations?
2. Why do you think Löscher’s restructuring decisions have generated less controversy than did Kleinfeld’s?
3. Assume a colleague read this case and concluded “This case proves restructuring efforts do not improve a company’s financial performance.” How would you respond to this statement?
4. Do you think a CEO who decides to restructure or downsize a company takes the well-being of employees into account? Should he or she do so? Why or why not?

A university surveyed recent graduates of the English Department for their starting salaries. Four hundred graduates returned the survey. The average salary was $25,000. The population standard deviation was $2,500. What is the 90% confidence interval for the mean salary of all graduates from the English Department?

A) [$24,794, $25,206]

B) [$24,988, $25,012]

C) [$22,500, $27,500]

D) [$24,755, $25,245]

CASH FLOWS AND FINANCIAL STATEMENTS AT SUNSET BOARDS, INC.

Sunset Boards is a small company that manufactures and sells surfboards in Malibu. Tad Marks, the founder of the company, is in charge of the design and sale of the surfboards, but his background is in surfing, not business. As a result, the company’s financial records are not well maintained.

The initial investment in Sunset Boards was provided by Tad and his friends and family. Because the initial investment was relatively small, and the company has made surfboards only for its own store, the investors haven’t required detailed financial statements from Tad. But thanks to word of mouth among professional surfers, sales have picked up recently, and Tad is considering a major expansion. His plans include opening another surfboard store in Hawaii, as well as supplying his “sticks” (surfer lingo for boards) to other sellers.

Tad’s expansion plans require a significant investment, which he plans to finance with a combination of additional funds from outsiders plus some money borrowed from banks. Naturally, the new investors and creditors require more organized and detailed financial statements than Tad has previously prepared. At the urging of his investors, Tad has hired financial analyst Christina Wolfe to evaluate the performance of the company over the past year.

After rooting through old bank statements, sales receipts, tax returns, and other records, Christina has assembled the following information:

Sunset Boards currently pays out 40 percent of net income as dividends to Tad and the other original investors, and it has a 21 percent tax rate. You are Christina’s assistant, and she has asked you to prepare the following:

1. An income statement for 2017 and 2018.

2. A balance sheet for 2017 and 2018.

3. Operating cash flow for each year.

4. Cash flow from assets for 2018.

5. Cash flow to creditors for 2018.

6. Cash flow to stockholders for 2018.

7. What are the limitations of financial statements?

Sunset Boards is a small company that manufactures and sells surfboards in Malibu. Tad Marks, the founder of the company, is in charge of the design and sale of the surfboards, but his background is in surfing, not business. As a result, the company’s financial records are not well maintained.

The initial investment in Sunset Boards was provided by Tad and his friends and family. Because the initial investment was relatively small, and the company has made surfboards only for its own store, the investors haven’t required detailed financial statements from Tad. But thanks to word of mouth among professional surfers, sales have picked up recently, and Tad is considering a major expansion. His plans include opening another surfboard store in Hawaii, as well as supplying his “sticks” (surfer lingo for boards) to other sellers.

Tad’s expansion plans require a significant investment, which he plans to finance with a combination of additional funds from outsiders plus some money borrowed from banks. Naturally, the new investors and creditors require more organized and detailed financial statements than Tad has previously prepared. At the urging of his investors, Tad has hired financial analyst Christina Wolfe to evaluate the performance of the company over the past year.

After rooting through old bank statements, sales receipts, tax returns, and other records, Christina has assembled the following information:

Sunset Boards currently pays out 40 percent of net income as dividends to Tad and the other original investors, and it has a 21 percent tax rate. You are Christina’s assistant, and she has asked you to prepare the following:

1. An income statement for 2017 and 2018.

2. A balance sheet for 2017 and 2018. (HINT: remember than both sides must balance...force equity to be what it needs to be in order to make this happen...it is the "plug" variable.)

3. Operating cash flow for each year.

4. Cash flow from assets for 2018.

5. Cash flow to creditors for 2018.

6. Cash flow to stockholders for 2018.

Facts:

A Big Company (ABC) is one of several corporations owned entirely by XYZ corporation. XYZ is publicly traded on a stock exchange. ABC makes an over-the-counter vitamin pill that has been very popular for many years.

ABC engaged the services of a marketing firm, SellALot, LLC, to market this diet pill. Mr. Bragger, the member of the LLC with whom the CEO of ABC directly dealt, had previously told many of SellALot’s clients that he worked for ABC. SellALot was the exclusive distributor for this vitamin pill in the US. Mr. Bragger is also a member of the Board of Directors of XYZ. SellALot has 4 other members of this LLC.

The CEO of ABC, Mr.Successful, was also on the board of XYZ. He and his partner, Counts Fingers (who was also Mr. Successful’s CPA) owned approximately 25% of the outstanding stock of XYZ. The general partnership was known as S and C Partnership (a limited partnership with Mr. Bragger as the only limited partner and the partner who provided the funds to buy the stock from Mr. Successful and Counts Fingers) actually owned this stock after Mr. Successful and Counts Fingers transferred the stock to the partnership.

Counts Fingers is also the Chief Financial Officer for Mega Bucks Bank which made the loan to Mr. Bragger- he used those loan proceeds to contribute to the S and C Partnership to buy the XYZ stock from Mr. Successful and Counts Fingers. Mr. Bragger is a member of the Board of Directors of Mega Bucks Bank.

ABC’s vitamin pill has recently been the subject of much attention and litigation. The pill has apparently caused many health problems with those who have taken it for more than a couple of weeks. Over 1,000 of those who took the pill for more than 4 weeks at a time have had heart valve replacement surgery and it appears that this surgery was necessitated by the vitamin pill which ABC makes. There is a class action lawsuit with more than one million class members who have been harmed in some fashion by this vitamin pill. The class action lawsuit filings have demanded 5 billion dollars in damages for all of these litigants.

XYZ is currently considering selling ABC to an investor (Private Equity, LLC.). You have been hired to determine how much money ABC might be worth and to assess the litigation exposure of ABC for this vitamin pill made by ABC.

Questions:

1. Describe the agency relationships of the business organizations and the individuals named in this fact situation and describe the duties of each to the other. (You only have to describe the duties once and then you can refer to this list with all of the other agency relationships you discuss) If the parties could be in more than one agency relationship, the be sure to include all of the possibilities in your response.

2. Explain the legal theory that would make XYZ liable for the ABC lawsuit.

   Would there be any viable defense to this liability claim against XYZ?

3. Describe and explain how SellALot, LLC, C and S Partnership,and Mega Bucks Bank would each be liable for the vitamin pill litigation.   

4. What is your recommendation to your client, Private Equity, LLC and why is this your recommendation?

Koh Brothers Limited acquired a factory for $54 million on June 30, 2013, to produce hospital machines and equipment. The company estimated the factory has a useful life of 25 years with $2 million in residual value at the end of its useful life. The company adopted a straight-line depreciation method for all its property, plant, and equipment. The factory’s market value appreciated steadily to $60 million at the end of the company’s financial year, December 31, 2013. On June 30, 2014, the factory was sold for cash at $59 million. Assume that Koh Brothers Limited rented out the factory to another unrelated party. Show the journal entries if the company account for the factory using the fair value method.