Memorandum to the File JM CASE.docx - Memorandum to the...

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Memorandum to the File Date: October 30, 2019 From: Kara Songer Re: Research and analysis in concern to JM Custom Wheels. Facts JM Custom Wheels, Inc. was originally named Johnson Wheel Company until 2004 when they filed for voluntary bankruptcy. The new owners purchased the assets and named the new company JM Custom Wheels, Inc. and incorporated as a subchapter S corporation, not publicly traded. After the purchase, the new owners realized they underestimated the company’s long- term capital needs. Short-term credit was more expensive than long-term financing creating an unexpectedly high interest expense, and they were facing several unexpected cost overruns. These issues caused a cash flow problem in late 2004 and early 2005. During 2004 and 2005, Jenna was the controller for JM. Jim Harper is JM’s CFO and was Jenna’s direct superior meaning he had final approval authority on all financial activities and reporting. Jim made changes to the useful lives of some assets, increasing a majority of the equipment’s depreciable life from 7 to 15 years and increasing computer life and tech equipment from 3 to 5 years. The depreciation expense decreased by an estimated $30,000 for 2005. He accounted for it as required by the Statement of Financial Accounting Standards No. 154, so Jenna did not question the changes. Without the changes, JM would not have met the required debt ratio for 2005 in concern to their loan agreement. Jenna left the company in November of 2006 and accepted a manager position at Young & Pricehouse in their consulting department. She is a member of the board still at JM alongside Allen Parks, JM’s former manufacturing manager who took over Jenna’s controller position. Allen found out after Jenna left the company that Jim was misstating shipment dates on the bank loan collateral documents. Allen considers Jenna a close friend and decided to discuss with her the dilemma he is facing. Without misstating the shipment dates, they would have to make late payments to their aluminum supplier and be forced into COD purchases for the aluminum. The record book would be correct, however, the collateral certificate and sales register on today’s date wouldn’t match.
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