Sea Wonder Corporation - Case Study

Sea Wonder Corporation - Case Study

Case Overview

This case is about a Canadian privately owned company, Sea Wonder Corporation (SWC), started recently (i.e. 2008). The company has represented a remarkable growth in since its establishment. This year (2013) has been a challenging year for the company, as it has invested a huge sum ($ 8.2 million) in new molding machine, and for that the company has taken a $ 7 million term loan from the Commercial Bank of Canada. These steps have implied certain changes in the financial statements of the SWC. In addition, the tax policy of the firm has changed from pre-tax basis to future income tax method, which obviously made particular impact on taxable income and balance sheet.

Furthermore, the bank debt covenants provided two covenants with respect to balance sheet ratios, including that current ratio of the firm must exceed 1 to 1 and the total debt to equity ratio must be less than 4 to 1. If these covenants are breached by Sea Wonder Corporation, then the bank will call for loan repayment within 30 business day's notice, which will increase the financing cost of the firm. Thus, in a nut shell it can be stated that company has invested a huge sum in new machinery and for that it has applied for term loan. This debt has provided two covenants that must not be breached by the firm. Moreover, the taxation policy of the firm has changed from taxes payable method of accounting standard for private companies to future income taxes method for its bank.

Revised Statement of Financial Position

Sea Wonder Corporation Revised Statement of Financial Position

As of December 31, 2013

(In Thousands)

 

 

Current assets

 

Cash

$ 1,200

Accounts receivables

$ 2,690

Inventory, at lower of cost or net realizable value

$ 513

Prepaid expenses

$ 219

Deferred Income

$ 253 $ 4,875

Capital assets, net of depreciation

$ 12,993 $ 17,868

Current liabilities

 

Bank operating line of credit

$ 295

Accounts payable and accrued liabilities

$ 3,071

Deferred revenue - government grant for the new machinery

 

(written off straight-line over 4 years)

$ 900 $ 4,266

Taxes payable

$ 396

Long-term debt

$ 7,500

Shareholders' equity

$ 5,706 $ 17,868

The statement of financial position of Sea Wonder Corporation (SWC) is revised by adding two new items in the statement, including deferred income and taxes payable. Deferred income is recorded as current asset and taxes ...