A. Conclusion and Statement of Case Situation
Mr. Shields’ should accept Mr. Fordham’s proposal in relation to the acquisition of Upstate Canning Company, Inc. In this case, Mr. Shields attempts to conclude if he should acquire the company from its owner, Mr. Fordham, using his personal savings of $35,000 in addition to an investment of $65,000 from his associates. Moreover, Mr. Fordham proposes that he will loan Mr. Shields’ $300,000 worth of income bonds, to be repaid in up to 10 years. Mr. Fordham provides Mr. Shields’ with a bond repayment schedule which allows Mr. Shields’ to repay the bonds at a discount if he meets the wishes to repay the bonds back early. Mr. Shields’ faces a …show more content…
The vegetables and fruits canned by Upstate were bought on a contract basis from farmers in the surrounding area, where farmers were paid cash. Labor was paid on a weekly basis. The direct costs that could be accounted for in A/P were cans and other ingredients, which could be purchased on normal terms of 2/10, net 30 days. Mr. Fordham also mentions that the purchases of cans could be paid in net 60, without ruining Mr. Shields’ line of credit. Given this information, I deduced that it would be best for Upstate Canning to not take the 2/10 discount, and repay all of its A/P on a 30 day schedule. The A/P account was calculated by finding the sum of all Purchases made on A/P, specifically cans and other ingredients. Given the production schedule developed by Mr. Fordham, July and October each accounted for 16.67% of production, while production in August and September was of 33.3% of total production for the year. Thus, the purchases on A/P were made accordingly, multiplying the total cost of cans and other ingredients by the percentage of production of each month.
ix) Bonds Interest Payable-This account represents the balance of the interest to be paid on the income bonds issued by Mr. Fordham. Thus, the beginning balance is zero. As referenced to in the