The Toledo Shirt Company
manufactures men’s shirts sold to department stores and other outlets
throughout Ohio, Illinois, and Indiana. For the past 14 years, one of Toledo’s
major customers has been Abraham and Sons, a chain of nine stores selling men’s
clothing. Mr. Abraham retired 18 months ago and his two sons took complete
control of the organization. Since that time, they have invested significant
sums of money in an attempt to expand each store by also selling women’s
clothing. Success in this new market has been difficult. Abraham and Sons is
not known for selling women’s clothing, and no one in the company has much
expertise in the area.
Approximately seven months ago,
James Thurber, Toledo’s chief financial officer, began to notice that it was
taking longer than usual to collect payments from Abraham and Sons. Instead of
the normal 30 days, the retailer was taking 45 days—and frequently longer—to
pay each invoice. Because of the amount of money involved, Thurber began to
monitor the balance daily. When the age of the receivable ($343,000) hit 65 days,
he called Abraham and Sons. The treasurer assured him that the company was
merely having seasonal cash flow issues but that payments would soon be back on
a normal schedule.
Thurber was still concerned and
shortly thereafter placed Abraham and Sons on a “cash and carry” basis. No new
sales were to be made unless cash was collected in advance. The company’s
treasurer immediately called Thurber to complain bitterly. “We have been one of
your best customers for well over a decade, but now that we have gotten into a
bit of trouble you stab us in the back. When we straighten things out here, we
will remember this. We can get our shirts from someone else. Our expansions are
now complete; we have hired an expert to help us market women’s clothing. We
can see the light at the end of the tunnel. Abraham and Sons will soon be more
profitable than ever.” In hopes of appeasing the customer while still
protecting his own position, Thurber agreed to sell merchandise to Abraham and
Sons on a very limited credit basis.
A few days later, Thurber received a
disturbing phone call from a vice president with another clothing manufacturer.
“We’ve got to force Abraham and Sons into involuntary bankruptcy immediately to
protect ourselves. Those guys are running the company straight into the ground.
They owe me $230,000, and I can only hope to collect a small portion of it now.
I need two other creditors to sign the petition and I want Toledo Shirt to be
one of them. Abraham and Sons has already mortgaged all of its buildings and equipment
so we can’t get anything from those assets. Inventory stocks are dwindling and
sales have disappeared since they’ve tried to change the image of their stores.
We can still get some of our money but if we wait much longer nothing will be
left but the bones.”
Should the Toledo Shirt Company be loyal to a good customer
or start the bankruptcy process to protect itself? What actions should Thurber
Viron, Inc., was created in 2006 to
recycle plastic products and manufacture a variety of new items. The actual
production process was quite complex because the old plastic had to be divided
into categories and then reclaimed based on the composition. Viron made new
products based on the type of plastic available and the market demand.
In December 2010, the company spent
$7.1 million to construct a building for manufacturing purposes. It was
designed specifically to meet Viron’s needs. The building was constructed near
Gaffney, South Carolina, to take advantage of a large labor force available
because of high unemployment in the area.
Unfortunately, because of the
lingering recession, Viron was not able to generate revenues quickly enough to
reach a break-even point and was forced to file for bankruptcy. An accountant
was hired to produce a statement of financial affairs to aid the parties in
deciding whether to liquidate or reorganize.
In producing the statement of
financial affairs, the accountant needed to establish a liquidation value for
the building in Gaffney that was the company’s largest asset. A real estate
appraiser was brought in and made the following comments about the
structure. The building is well constructed and practically new. It is
clearly worth in excess of $7 million. However, I doubt that anyone is going to
pay that much for it. We don’t get a lot of new industry in this area, so not
many companies need to buy large buildings. Even if a company did buy the
building, it would have to spend a significant amount of money for conversion.
Unless a company just wanted to recycle plastics, the building will have to be
completely adapted to any other purpose.
To tell you the truth, I am not sure
it can be sold at any price. There are a lot of abandoned buildings in this
area of South Carolina. Of course, if someone wants to recycle plastics, it
just might bring in $7 million.
In producing the statement of financial affairs, how should
the accountant report this building?