Microline Insurance Company Case Study
1. Is there any evidence that management’s bonuses caused it to enter into any transactions, especially at year-end, that may not have been in the shareholder’s interest?
I first need to understand the way managements bonuses are calculated. Per the notes, at the end of the year, Microline’s executives share equally in a bonus, which is equal to 25% of the dollar amount by which the corporation’s net income exceeds 10% of the shareholder’s equity dollar amount at the beginning of the year. To determine if the bonuses cause any conflicts, I must calculate what those bonuses were and to do that I will look to the balance sheet. The shareholder’s equity for 2013 is $22,500 and I arrived at that figure by adding retained earnings and paid in capital of …show more content…
Because the current ratio has two components; total current assets and total current liabilities, I will look at the balance sheet and the notes to see what transactions would have affected either of those numbers. In the notes, Microline indicates that the 90 day note payable that was entered on Nov 12, 2014 was converted into a long-term note. By doing this the company lowered their current liability number and would able to keep their current ratio above 1.0 to comply with the terms of the 10-year loan. Having to maintain a current ratio above 1 influenced management decision to restructure a debt obligation from short-term to long-term.
3. What was the acquisition price of Littleton when it was purchased by Microline?
Microline acquired Littleton and has goodwill of $5,250 for both 2013 and 2014 year’s end. This would mean that the goodwill amount of $5,250 was the excess that Microline paid above the $7,500, the net fair-market-value of Littleton’s assets and liabilities at the time, and would mean that the total purchase price is $12,750.
4. Is Microline’s bad debt allowance
I first need to understand the way managements bonuses are calculated. Per the notes, at the end of the year, Microline’s executives share equally in a bonus, which is equal to 25% of the dollar amount by which the corporation’s net income exceeds 10% of the shareholder’s equity dollar amount at the beginning of the year. To determine if the bonuses cause any conflicts, I must calculate what those bonuses were and to do that I will look to the balance sheet. The shareholder’s equity for 2013 is $22,500 and I arrived at that figure by adding retained earnings and paid in capital of …show more content…
Because the current ratio has two components; total current assets and total current liabilities, I will look at the balance sheet and the notes to see what transactions would have affected either of those numbers. In the notes, Microline indicates that the 90 day note payable that was entered on Nov 12, 2014 was converted into a long-term note. By doing this the company lowered their current liability number and would able to keep their current ratio above 1.0 to comply with the terms of the 10-year loan. Having to maintain a current ratio above 1 influenced management decision to restructure a debt obligation from short-term to long-term.
3. What was the acquisition price of Littleton when it was purchased by Microline?
Microline acquired Littleton and has goodwill of $5,250 for both 2013 and 2014 year’s end. This would mean that the goodwill amount of $5,250 was the excess that Microline paid above the $7,500, the net fair-market-value of Littleton’s assets and liabilities at the time, and would mean that the total purchase price is $12,750.
4. Is Microline’s bad debt allowance