Question: Leos Janacek is CEO and controlling shareholder of Mira Products

Leos Janacek is CEO and controlling shareholder of Mira Products, Inc., a Vancouver- based company listed on the TSX. Mira’s principal business is the manufacture of furniture for small children. The company has two product lines:
(1) Home furniture and
(2) Institutional furniture for schools, hospitals, daycare centres, and so forth. Home furniture is produced under contract by a manufacturer in Quebec and accounts for about 20% of the company’s revenue. The institutional division operates two production facilities on its own, one in British Columbia and another in the Czech Republic. Institutional furniture accounts for a little over 70% of the company’s revenue and 90% of its net earnings.
Twelve years ago, Mira had purchased the net assets of a Quebec company that manufactures a well- known line of stuffed animals known as PitaPets, which is also the name of the company. PitaPets has contributed less than 10% of Mira’s revenue and a miniscule portion of earnings. PitaPets’ products are sold through different outlets than are Mira’s furniture product lines.
Mr. Janacek, with the concurrence of the Mira Board of Directors, has decided to restructure the company. Mr. Janacek wants to modernize the Czech production facilities and sell PitaPets to obtain the necessary funds for modernization. Mira was never seriously involved with operating PitaPets, but had let the former owners continue to operate the firm with only broad overview by Mr. Janacek and his CFO. Consequently, Mira Products Inc. took the following actions by the end of 20X4, the current fiscal year: a. Operating through a broker, Mira reached agreement to sell the net assets of PitaPets to a U. S. company for $ 12 million cash, contingent on the buyer’s due diligence inspection of PitaPets’ books and operations. The closing date for the deal is set for 15 May 20X5. Mira will have to have responsibility for the employees of PitaPets, who will continue to work for that firm subject to any subsequent decisions made by PitaPets’ new owners. The year-end 20X4 carrying value of PitaPets’ net assets is $ 8.6 million.
b. Mira publicly announced to the business media (and to the employees) that the Czech operation would be upgraded. The announcement contained the following specifics:
i. Negotiations for equipment modernization were underway with a German manu-facturer. Mira had made a deposit of € 1 million as an indicator of good faith. The deposit is 90% refundable if Mira and the German manufacturer do not come to an agreement. The estimated equipment cost is € 6.6 million. At the end of 20X4, the euro was worth C$ 1.40. The old equipment will be dismantled and taken away by the German manufacturer at no cost to Mira Products Inc. The carrying value of the old equipment is € 1.2 million
ii. Mira will provide retraining to affected employees in the Czech plant. Mira signed a € 80,000 contract with a Czech training firm to deliver training over a three- week period once the new equipment is installed. The targeted installation date is 17 June 20X5.
iii. Employees who are surplus to the Czech plant’s needs after the modernization will be given six months’ severance pay and assistance with finding a new position. The estimated cost of severance is € 650,000. At the insistence of the Czech government, Mira deposited € 150,000 toward the cost of the severance package in a special restricted account in a government bank.

Assume that Mira Products is a public company. How should this reorganization be reported in Mira Products Inc.’s financial statements for 20X4? Be specific.

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  • CreatedFebruary 17, 2015
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