Dry Clean Depot Ltd.
| Case Assignment #1 | Case 12-1 | | Russell D’Cunha Student #100443790 Busi 3102U-002 | | Due Date: January 24th, 2013 |
Dry Clean Depot Limited
Overview:
Dry Clean Depot is a private company, Max the CFO has asked me (Professional Accountant) to analyse any accounting implications with regarding a new loan and other issues within the company. Dry Clean Depot Limited (DCDL) has elected to report under the constraints of IFRS, although they could have elected ASPE as their reporting standards, since they are a private company. DCDL is a company with 40 dry cleaning stores in southern Ontario. DCDL has revenues of approximately $7 Million.
DCDL has arranged for a $2,000,000 loan for the purchase of some new equipment for the business. The covenants of the new loan are as follows: * Maximum 2-to-1 debt-to-equity ratio * Minimum cash balance of $500,000 * Maximum dividends of $100,000 per year
Issues:
Lease:
IFRS states that “An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.” The lease of the Sudbury retail location is therefore an onerous contract. DCDL has an obligation to pay $27,500 per year for the lease on the Sudbury location. The sub-contract agreement DCDL has is a sub-lease that pays $5,000 for year one, and $5,000 each year for the next three years, plus 10% of sales over $150,000. A liability of the difference $27,500 and $5,000 will need to be recorded $22,500/ year, today, in accordance with the time value of money; as this is a present obligation of the company, IFRS states that a liability will need to be recorded. This would worsen the debt-to-equity ratio, which is not aligned with management’s objectives.
Contamination Issue:
DCDL uses perchloroethylene (perc) in its cleaning process in eight of its operating sites. This chemical is a hazardous air contaminant. There is an
Dry Clean Depot Limited
Overview:
Dry Clean Depot is a private company, Max the CFO has asked me (Professional Accountant) to analyse any accounting implications with regarding a new loan and other issues within the company. Dry Clean Depot Limited (DCDL) has elected to report under the constraints of IFRS, although they could have elected ASPE as their reporting standards, since they are a private company. DCDL is a company with 40 dry cleaning stores in southern Ontario. DCDL has revenues of approximately $7 Million.
DCDL has arranged for a $2,000,000 loan for the purchase of some new equipment for the business. The covenants of the new loan are as follows: * Maximum 2-to-1 debt-to-equity ratio * Minimum cash balance of $500,000 * Maximum dividends of $100,000 per year
Issues:
Lease:
IFRS states that “An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.” The lease of the Sudbury retail location is therefore an onerous contract. DCDL has an obligation to pay $27,500 per year for the lease on the Sudbury location. The sub-contract agreement DCDL has is a sub-lease that pays $5,000 for year one, and $5,000 each year for the next three years, plus 10% of sales over $150,000. A liability of the difference $27,500 and $5,000 will need to be recorded $22,500/ year, today, in accordance with the time value of money; as this is a present obligation of the company, IFRS states that a liability will need to be recorded. This would worsen the debt-to-equity ratio, which is not aligned with management’s objectives.
Contamination Issue:
DCDL uses perchloroethylene (perc) in its cleaning process in eight of its operating sites. This chemical is a hazardous air contaminant. There is an