A local Do It Yourself (DIY) store is experiencing problems getting a loan from the bank as they have not been able to keep up with loan repayments in the past.  The bank now sees the company as high risk. However, over the past 12months, business has really picked up due to a nearby DIY store closing down.  The company now needs to extend the premises so they can hold more stock to meet demand.

Herbal Care Corp., a distributor of herb-based sunscreens, is readyto begin its third quarter, in which peak sales occur. The companyhas requested a $70,700, 90-day loan from its bank to help meetcash requirements during the quarter. Because Herbal Care hasexperienced difficulty in paying off its loans in the past, theloan officer at the bank has asked the company to prepare a cashbudget for the quarter. In response to this request, the followingdata have been assembled:

a. On July 1, the beginning of the third quarter, the company willhave a cash balance of $33,000.
b. Actual sales for the last two months and budgeted sales for thethird quarter follow (all sales are on account):


May (actual) $240,000
June (actual) $250,000
July (budgeted) $580,000
August (budgeted) $620,000
September (budgeted) $360,000

Past experience shows that 26% of a month

6.1 (Prepare T-Accounts): Carolyn Wells had the followingtransactions. Provide total ending balances of each T-Account

A. Jan 1 2016, Carolyn Wells deposited$120,000 into the business which is called the Carolyn Wells, CPA(sole proprietor structure)

B. Jan 5, 2016, The company purchasedsome office furniture for $2,500 by paying cash.

C. It also purchased a business carfor $25,000 by paying $10,000 cash and getting a loan from a localbank for $15,000 for 15 years.

D. Jan 1, 2016, Paid office rent of$1000 for the month of January.

E. Jan 27 2016, Prepared a tax-returnand billed a client $1500 for the services provided. Client willpay in the next 30 days

F. Jan 1, 2016, Purchased insurance toprotect the business and the business car in the amount of $2400for 12 months. The company paid it with the company check 502.

G. Jan 30 2016, Owner purchased a carfor her PERSONAL use and NOT for Business use

H. Jan 30 2016, company paid $200 forUtility Bill

I. Jan 30 2016 Company incurredsalaries expenses of $5000, but will be paying on February5^th

J. Client from transaction E paid thecompany $1500

6.2 Prepare Adjusting entries as of January 31, 2016:

Plastic Co Pte Ltd (‘Plastico’) is a Fiji company. The company has issued and paid up capital of $250,000 held in equal parts by two brothers. The company’s business involves making plastic products for the local market.

The brothers are planning to emigrate to New Zealand and wish to sell the company. An agreement in principle is reached for X to buy the company for $1 million. This is a cash sale.

Presume that you are wealthy and a longtime friend of X.

X comes to see you. She explains that she has in hand $800,000 (from her own savings and bank financing) and is short $200,000 to close the deal. X wants you to loan her $200,000. X has two specific proposals as follows.

Proposal One

Plastico is an old company. When founded it established its factory on the outskirts of Suva. Since that time Suva has grown and spread with the consequence that the land on which the factory stands is today much more valuable than when the factory was built. X has had the land valued at $300,000.

X has found alternative factory premises on the outskirts of modern Suva that would be suitable for the company. These premises are for sale for $100,000.

X proposes that you lend her $200,000 for four months only. X will acquire Plastico. The company’s new directors, X and her husband, will have Plastico sell its current factory and relocate to the premises already identified. The relocation will provide net cash of $200,000. Plastico will then pay a dividend of $200,000. X will use the distribution to repay your loan.

Proposal Two

X proposes that you lend her $200,000. This will be a longer term loan of say 6 years to be paid down incrementally over the life of the loan. Plastico will retain its present factory premises. As security for the loan, Plastico’s new directors, X and her husband, will have Plastico grant you a first mortgage over the current factory premises. Given the valuation placed on the premises the loan will be almost risk free.

Further details of both proposals provide an attractive return for you on the financing.

Required:

Consider each proposal separately and in turn.

Does the proposal offend any of the capital maintenance rules?

[Note ‘agreement in principle’ refers to a situation where two parties have agreed on all the terms of a deal (i.e. contract) but have not yet formally committed to the deal. In this story the parties (X and the two brothers) will only sign the contact document detailing the agreement when X has lined up the required cash of $1 million.]