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A Liquidation Dilemma & A Liquidation Dilemma

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Question;CASE 2 WRITING TASKWriting cconducting the requisite analysis, please prepare a one-pageletter to Mary Skeptic, Chief Financial Officer, Polar Bear, Inc., signed by you as partner in yourfirm, in the proper format.The requested schedule calculating the cash Polar will need for additional taxes if Polar decidesnot to adopt the Notus plan (using ?With Purchase? and ?Without Purchase? tables) should be placedon a separate page as an appendix.Additionally, please list your references on a separate page stapled to your letter.FormatYour letter should be on your firm letterhead stationery addressed to Mary Skeptic, CPA, ChiefFinancial Officer, Polar Bear, Inc. If you have not yet created your own firm letterhead for thiscourse, please do so. Please remember to sign your letter in ink above your typed name and title.The U.S. Mail address for Mary Skeptic, CPA, Chief Financial Officer, Polar Bear, Inc., is: PolarBear, Inc., 1200 Sugar Cone Drive, Chatsworth, CA 91311.As noted above, please list your references on a separate page attached to your letter. Theschedule requested by Mary Skeptic should be placed on a separate page as an appendix.In submitting your Case 2 Letter first to Accounting 351 and then Accounting 351COM,please also attach the relevant grading Rubric.**********************************************************************Case 2A Liquidation DilemmaPolar Bear, Inc. (Polar) is a small-sized publicly traded company engaged in the production anddistribution of ice cream. Polar has been using the LIFO inventory cost flow assumption for manyyears, and at the beginning of the year had a LIFO layer of 800,000 gallons of sweetener(high-fructose corn syrup HFCS-42) at an average LIFO price of $1.08 per gallon. Except for thedairy products used to produce the ice cream, the sweetener is Polar?s largest and most costlyinventory item.Polar requires approximately 150,000 to 200,000 gallons of sweetener to service its customers for amonth. Polar?s sales have been unexpectedly high as the company approached the end of the year.Consequently, by the time the December 31 year-end arrives, Polar anticipates having only aninventory of 200,000 gallons of sweetener.Polar is concerned because it expected to have a year-end inventory above the current LIFO layer of800,000 gallons.Polar?s Controller, Gladys Notus, stated in a recent Staff Accounting meeting: ?From a cash flowpoint of view the company must maintain - and possibly increase - the LIFO layer in order to avoida LIFO liquidation nightmare? resulting in higher taxes for which Polar does not have additionalcash readily available. Unfortunately, Polar?s normal supplier is also currently experiencingshortages and cannot deliver the required quantities of sweetener before the end of the year.The issue has generated considerable debate among top management. At a second meeting called todiscuss this problem, Notus reported that at a recent CalCPA luncheon, Ben Real, the controller ofanother ice cream producer, Pleasant, Inc. shared with her that Pleasant, Inc. had not been asprofitable as Polar during the year, and that its earnings were going to fall just slightly shortof Wall Street and internal targets. Now that summer is over, Ben told Gladys, Pleasant Inc.?s icecream sales ?were not going to be high enough to put them over the top ? and there goes theperformance bonuses and value of Pleasant?s stock.? As a result, Pleasant was actually going tohave a surplus of sweetener that will not be needed until production demand increases in the new year. Pleasant was also having a severe cash flow problem caused by its purchase of too much rawmaterial inventory (especially the sweetener) and its inability to obtain additional financing dueto covenants on existing debt that limits future borrowing. As the controllers discussed theirrespective problems, the following plan began to develop:Polar would purchase 700,000 gallons of sweetener from Pleasant prior to year-end at$2.50 per gallon (the current wholesale price). Pleasant would agree to repurchase the sweetenerfor $2.65 a gallon within six months. The sweetener would not be shipped to Polar, but would bestored in a public warehouse. To help Pleasant with its cash flow problem, Polar would use thesweetener as collateral to obtain a 6-month loan, which would be given to Pleasant as payment forthe inventory. The cash paid by Pleasant to repurchase the sweetener would be used by Polar torepay the loan plus interest andthe cost of storage. In the new year, Polar would get an extra boost in earnings whenthe inventory was repurchased by Pleasant.Upon learning the details, Polar?s CEO, Thatis A. Winninghand, declared: ?this plan is a win-winfor all? because Polar would be able to obtain its much-needed inventory layer and Pleasant wouldsolve its cash flow and earnings problems.While the other Polar executives celebrated the Notus plan, the CFO, Mary Skeptic, is not asenthusiastic. Skeptic is concerned about whether this transaction should be accounted for as apurchase, and seeks your advice in order to obtain assurance that the proposed transaction does notviolate GAAP. Skeptic also is concerned about the Sarbanes-Oxley requirement that she andWinninghand eventually need to certify Polar?s financial statements.Skeptic would like you to provide her with your conclusions and recommendation(s) on the issues herstated concerns raise. Skeptic would also like you to prepare a schedule that calculates the cashPolar will need for additional taxes if Polar decides not to adopt the Notus plan (using ?WithPurchase? and ?Without Purchase? tables).You are provided with projections from Skeptic (below) and are told to assume that the inventorylevels of the other ice cream ingredients will remain constant.Revenue (projected) $15,400,000 Operating expenses (projected) $ 6,000,000 Tax rate (federal and state) 40%Sweetener Inventory Records:Beginning inventory 800,000 gal. @ $1.08 (LIFO)Purchases 1,900,000 gal. @ $2.35 (LIFO) Endinginventory (without purchase) 200,000 gal. @ $1.08 (LIFO)Proposed purchase 700,000 gal. @ $2.50[For this case only, ignore the Pending Content in the Codification for anytandard you might use.]

 

Paper#39997 | Written in 18-Jul-2015

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