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Jerry Johnson is the Financial V.P. for Montvale Corporation. Montvale is a nonprofit corporation that supervises the operations of several continuing care retirement communities. In 1990 Montvale began construction of a new retirement community called Riverview. The first full year that Riverview was in operation was 1993. By January 1994, they had reached 99% capacity with a total capacity being 356 people. They charged an entrance fee of $186,000 per apartment and each resident paid monthly dues on the average of $2,100 for one person and $770 for a second person. Montvale's policy was that they charge fees that were fair to both the resident's and the organization. They tried to budget fees so that they incurred just a modest allowance for working capital. It is now April 1994 and Jerry Johnson has just met with Walter Heaney, the administrator and Jeanne Mills, the controller of Riverview. They discuss the operating activities of Riverview over the next 5 years and also its capital requirements over the next 20 years.

Heaney and Mills bring forward two plans to change their format and the way they approach fixed assets. They want to change the focus to monthly fees needed to cover estimated expenses. They also want to eliminate depreciation and instead use debt to service principal, minor capital expenditures, and provision for renewal because unlike the depreciation number they affect future cash flows. They plan to establish a fund to provide for major renewals over the next 20 years at $70,000 a year and expand the health care unit in 2000 by $840,000.

The main problem with these plans is that eliminating depreciation would not follow GAAP principles. They would use the figures just for internal uses but, Montvale's audit committee didn't like inconsistency with their published statements. Also, they new proposal would cause the residents to end up paying for future renewals that they wouldn't benefit from. This seems to be inconsistent...
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