audit accounting unit 10
After reading Chapter 19 of your Forensic Accounting and Fraud Examination textbook, complete the following problems, which will help you apply your knowledge of business valuation:
· Case 51 on page 619.
· Case 52 on page 621.
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Cermco produces and sells specialty customer relationship management (CRM) solutions to small and medium-size businesses in the United States and Canada. The company is more than 20 years old and has a steady, loyal customer base.
A major reason for Cermco's success lies in the ability of its product to easily integrate with various accounting and ERP systems. As a result, even when clients upgrade their entire accounting systems to expensive ERP solutions, they continue to use Cermco's CRM because of its superior features.
Annual revenues for Cermco's three most recent years are about $11 million (20X3), $7 million (20X4), and $3 million (20X5), respectively. Overall interest expenses and operating margins have remained a relatively constant percentage of revenues.
Cermco attributes the decline in revenues to declines in market share as a result of natural client turnover and the entrance of many other small competing software companies into the market. Nevertheless, Cermco's CRM product continues to enjoy the highest industry ratings and a loyal customer base.
Cermco's balance sheets for the most recent three years follow:
Produce a valuation estimate for Cermco for December 31, 20X5. Use whatever valuation method you think best but justify your choice. Note that you can estimate the annual income from year-to-year changes in the balance sheet.
52. Bob Mark is the executor of his parents' estate that is being divided equally among his two brothers, Tom and Mike, and himself. The estate consists of cash and marketable securities worth $4.2 million and a duplex apartment building located in the Fort Lauderdale beach area.
The terms of the will gives Mike, the younger brother, the option of keeping the apartment building as part of his equal share of the estate. Thus, Bob must value the apartment building in order to determine how much to “charge” Mike's total share of the estate.
The apartment building is rather unusual because it is located on a deepwater lot with only 50 feet of waterfront exposure rather than the usual 100 feet. In fact, Bob's search of the entire area did not reveal any other waterfront properties with less than 100 feet of dock space.
Bob located three recently sold somewhat comparable buildings, each on a 100-foot deepwater lot. They were similar to the subject property except that each has four apartments instead of two apartments in the subject property. They were also considerably newer. The subject property was 60 years old, whereas the comparable properties were only 25 years old.
The average selling price of the comparable properties was $1.6 million with net annual rental values averaging $64,000 per year per building after property taxes and expenses. The subject property produces net annual rentals of $43,000 after property taxes and expenses.
Bob estimates that the replacement cost of the subject building is $500,000. The average replacement cost of the comparable buildings is $800,000.
To complicate the situation, the owner of the property adjacent to the subject property is willing to pay $1.7 million for it because annexing the subject property would give the owner a large enough lot on which to construct a 50-story condominium complex.
Mike argues that he has no desire to sell the property to the adjacent owner but that he wants to live on the property, and it should therefore be valued accordingly. He backs up his argument by reminding his brothers that their deceased parents hated the next-door neighbor and would never have sold to him under any conditions. In fact, the next-door neighbor had made repeated offers to buy from the parents while they were still alive.
How should Bob value the duplex apartment building? The other two brothers have agreed that they will accept whatever decision he makes.
After reading Chapter 20 of your Forensic Accounting and Fraud Examination textbook, complete the following problem, which will help you apply your knowledge of dispute resolution services:
· Case 28 on page 638.
28. Margaret Willis is the owner of Willis Concrete Company. Her company supplies poured concrete to residential and commercial construction sites throughout the San Diego area. She recently ran into a major problem with Telweda Construction Company, one of her oldest and largest customers. Telweda is a residential construction company that specializes in upscale new housing developments. Willis Concrete routinely pours concrete for hundreds of Telweda's job sites every month.
A recent problem occurred when it was discovered that because of improper concrete mixing, the concrete foundations and slabs for 23 of Telweda's new homes did not meet minimum materials standards. A local homeowner, a retired engineer, had discovered the problem only after he had moved into his new home. The bottom line was that none of the 23 homes was safe to live in. All had to be evacuated immediately, and the very expensive process of retrofitting foundations and slabs had to begin. The work would take months to complete, and Telweda's reputation has been severely damaged. Several homeowner lawsuits had already been filed, and more were on the way.
Margaret had always known of the possibility that mixing problems could occur. That is the reason that her contracts with all vendors included clauses that made it the responsibility of the vendor to perform tests on the quality of the concrete before relying on it.
Telweda argued that despite this clause in its contract with Willis, there was still a reasonable expectation that Willis would provide quality materials and assume responsibility for any problems. Therefore, the CEO of Telweda demanded that Willis pay $20 million to cover the damages.
a. From Willis's point of view, is litigation or ADR preferred? Why?
b. From Telweda's point of view, is litigation or ADR preferred? Why?
c. Which form of ADR could be preferred by the two companies?