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PET PROJECT EXPANSION “Crazy" Connor Cooper is a somewhat eccentric yet enthusiastic businessman who believes in the social responsibility of business. Incidentally, he is also interested in making enough money to live a comfortable life. As a supporter of the ecology movement, he is very concerned with the hunting of animals for industrial purposes, such as the making of furs, shoes, and ladies' handbags. As a consequence, he formed Reptile Factory Enterprise (RFP), a company with a mission of promoting crocodiles as household pets. (The choice of the animal was purely coincidental.) He plans to catch crocodiles in Southeast Asia and sell them in the United States. 1 The senior leadership team of the company consists of Mr. Connor Cooper (President), Brian Chu (Vice President of Production, who is in charge of catching crocodiles), Marco Diaz (Vice President of Sales), and Shelley Maze (Vice President of Operations, who is in charge of administrative functions including cash collection from customers). Facilities Planning The first task facing Mr. Cooper was to raise capital. This required estimating future capital needs by projecting the physical facilities and working capital needed for the business. Mr. Cooper's estimates showed that he would need a fleet of boats to catch crocodiles in Southeast Asia and a holding tank in the State of Gould to keep them alive in captivity after they are shipped. Because of the need to extend liberal credit terms to skeptical customers, the company needed working capital to carry inventories and receivables. Finally, the company needed a large start up investment for sales and an advertising campaign. The firm also needed funds to hire new employees and to rent office space in the State of Gould. Mr. Cooper asked Shelley Maze to prepare a forecast of activity to plan facility needs and to translate it into capital needed to start the business. First Year Results Based on the forecast provided by Ms. Maze, Mr. Cooper and his ecology minded friends raised the capital for acquiring the facilities. He leased ten boats in Southeast Asia, a 20,000 square foot warehouse with a holding tank for the crocodiles in the State of Gould, and a 2,500 square foot office in the State of Gould. Both the warehouse and the office were leased from Clyde Property Management (CPM) for three years, beginning January 1, 2008. The company opened its door for business on January 1, 2008. Marco Diaz launched an aggressive sales and advertising campaign built around the slogan that crocodiles were warm, friendly and greatly misunderstood creatures that deserved loving care. He designed a slick marketing campaign built initially around the slogan: "Crocodiles -- don't handbag them, handle them with love." During its first year, the company spent approximately $300,000 to catch 500 crocodiles. Of these, 300 crocodiles were sold and shipped to customers at a selling price of $1,000 per crocodile. Shipping costs of $50 per crocodile were paid for during the year. Customers were given liberal credit terms and only $160,000 from an equivalent 200 customers was collected during the first year. Ms. Maze estimated that as much as 20% of the sales price will be spent in collection costs and bad debts expenses. At the end of the first year, Mr. Cooper consulted with his other two colleagues and estimated that he could catch and sell 600 to 800 crocodiles for the next year. Because of the company's apparent success, Mr. Cooper wanted to expand its facilities. This meant getting funds to rent more boats and warehouse space. He believed that he could now overcome the skepticism of banks and ask for a loan. On January 2, 2009, Mr. Cooper notified Clyde Property Management that he no longer needed their current warehouse and office space. He would be vacating the properties by January 30th in order to move into larger facilities. | Assume that Mr. Cooper has somehow managed to obtain permits to sell live crocodiles legally. 1 PET PROJECT EXPANSION - Assume that you have been hired as a consultant by Shelley Maze to help her and Luis Norman. She has asked you for your help on the GAAP income statements and the legal issues arising from the lease cancellation. Please write a business report for Ms. Maze using the case writing guidelines and report format guide from the Gateway website. Please incorporate material regarding the following questions: Q. 1. Compute the net income per crocodile assuming that only one crocodile was caught, sold, and collected on in this year. Assume the costs of shipping the 500 crocodiles from Southeast Asia to the State of Gould is part of the $300,000 cost of catching them. The $50 shipping cost is the cost of shipping each crocodile from the holding tank in the State of Gould to the customer. Q. 2. a. Prepare three income statements for the year assuming that revenue is to be recognized when: soo 1. Crocodiles have been caught (i.e. production complete). 2. Crocodiles have been sold and delivered 3000 3. Cash collections are complete Duo b. What income would you report for 2008? Why? Support your answer with reference to appropriate FASB's rules. Q. 3. Consider all of the facts presented (including the memo from the lawyer in attachment # 2). What compensatory damages, if any, are owed to Clyde Property Management? What additional facts might you need in order to fully answer this question? Q. 4. What punitive damages, if any, are owed to Clyde Property Management? What additional facts might you need in order to fully answer this question? Q. 5. Show the journal entry to record the legal liability arising from the potential lawsuit. (If you find there is no liability, show the entry needed if there were liability)