Cayman Islands– based Harris Corporation is in the beauty industry. The company develops and produces a wide range of products for hair and skin care. The products are sold both at wholesale (through professional beauty supply stores) and retail (through various types of retail outlets and through hair and beauty salons and spas). Harris also owns a chain of hair styling salons that operate under the name “Hair First.” The chain operates through three subsidiaries, each operating in a single province— Ontario, Alberta, and British Columbia. In 20X3, Harris’s Board of Directors approved a restructuring plan that had two principal components that are expected to be completed within the first six to eight months of 20X4:
a. To obtain additional working capital, Harris will sell the factory that produces the skin care products for $ 1.8 million to a new company that is being formed by the litigation attorney that Harris retains for the many patent infringement cases that beset the industry. Harris will then lease the factory back on a year- by- year basis for $ 180,000 per year. If the attorney wishes to sell the building, Harris has the “right of first refusal” (which means that Harris gets precedence over other potential buyers). Harris will continue to pay all costs associated with building maintenance and operation. The building originally cost $ 3 million to construct; its carrying value at the end of 20X3 is $ 1.3 million.
b. Due to intense competition in Ontario, Harris has decided to divest itself of the Ontario salons. Harris has reached a tentative deal to sell about 60% of the salons to a competitor for $ 2.4 million; the new owner will continue to operate those salons under the Harris brand, paying Harris a 2% royalty of all Harris products sold through the salons. The current carrying value of the salons (as a group) is $ 2.8 million. The remaining 40% of the salons will be closed and the staff laid off with four weeks’ pay. Severance pay will amount to $ 600,000. Once all of the salons have been either sold or closed, the Ontario subsidiary will be liquidated and all funds will be transferred to Harris Corporation as the subsidiary’s sole secured creditor.
1. How would these plans and events be reported in Harris’s consolidated financial statements at the end of 20X1? Provide specific numbers, to the extent possible.
2. Comment on the ethical aspects of Harris Corporation’s plans.