Lisa Jonas founded Modern Inc., a leading manufacturer of custom wood and upholstered furniture, in 1995. Its
Question:
Lisa Jonas founded Modern Inc., a leading manufacturer of custom wood and upholstered furniture, in 1995. Its head office and main manufacturing facility are in Montreal. Modern reports under accounting standards for private enterprises (ASPE).
Ten years ago, Lisa’s nephew, Darren Carter, became the controller of the company. At first, Darren was very focused on the company. He instituted many worthwhile changes and improved the financial reporting process. More recently, however, Darren’s attention has shifted to a petroleum exploration venture that he and a couple of his university colleagues are pursuing.
On June 1 of this year, Darren resigned from Modern, acknowledging that he was spreading himself too thin. Lisa was understanding, but disappointed that none of her family wished to be actively involved in the business.
Lisa will be turning 64 this year and is starting to think about retirement. Currently, she personally guarantees the company’s bank loans; however, she is in discussions with the bank to remove this personal guarantee. Lisa feels that the company is financially healthy and profitable, and she is hoping that the bank will see that when the financial statements and this year’s review report are issued.
Lisa is also considering selling her business in the next six months or so. She has reached out to a valuations expert who indicated to her that the value of the company will be based on a multiplier of net income. Lisa’s investment in the business is her primary source of savings for retirement.
Task #1
Lisa has come to you, CPA, for financial advisory services. Asha Patel, the accounting clerk who has been filling in for Darren, has some questions on financial reporting issues. She has sent over the draft financial statements (Appendix I) and her questions (Appendix II). Lisa has asked you to respond to Asha’s queries.
Lisa has also asked you to determine whether Modern is in compliance with its term loan bank covenant and, if necessary, provide next steps regarding the results of your covenant calculation.
Managerial Accounting An Introduction to Concepts Methods and Uses
ISBN: 978-0324639766
10th Edition
Authors: Michael W. Maher, Clyde P. Stickney, Roman L. Weil