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 take?
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?