CASE 1.3Holton-Central Holdings Inc.Holton Chairs had been an innovative designer and producer of quality office chairssince Arnold Holton founded the firm in Grand Rapids, Michigan, in 1938. In 1947,Holton purchased Central Chairs and renamed itself Holton-Central Inc. WhenMr. Holton died in 1994, long-time executives managed the firm for his heirs. Througha variety of circumstances, including foreign competition, outdated productionequipment and processes, expensive wage contracts, and low quality, Holton-Central gradually became unprofitable. In early 2009, Holton-Central Inc., declaredbankruptcy and closed its doors. Because of concerns about chemical contaminantsat Holton-Central's original factory (no longer in use), no one would buy the corporation.as a going concern. Instead, one bidder offered to buy Holton-Central's assets, exceptfor the original factory, and resume operations at the current production facility underthe Holton-Central name.That bidder, Belmont Office Furniture, produced high-quality office desks. PeterCardell purchased Belmont Office Furniture's assets out of bankruptcy in 2003;within four years he increased revenues by 65% and returned Belmont to profitability.By 2009, Mr. Cardell decided to quire another office furniture company. On July 1,2009, the Holton-Central bankruptcy judge accepted Belmont's $4,765,000 offer forHolton-Central's assets and accounts payable. The $4,765,000 purchase price equaledthe market value of the tangible assets, minus $875,000 of accounts payable, plus$265,000, which Mr. Cardell considered goodwill:Raw material inventoryWork-in-process inventoryFinished goods inventoryEquipment (5-year life)Building (20-year life)LandTotal tangible assetsLess: Accounts payableNet tangible assetsGoodwillTotal purchase price$175,000$220,000$115,000$450,000$3,600,000$815,000$5,375,000$875,000$4,500,000$265,000$4,765,000On July 1, 2009, the acquisition was completed as follows:1. Belmont Office Furniture formed Holton-Central Holdings and paid $3.9 millionfor all 3,900,000 shares of Holton-Central Holdings' $.01 par value common stock.2. Holton-Central Holdings borrowed $6,000,000 to help Holton-Central exit frombankruptcy; the principal would be repaid in six $1 million payments each July 1,Copyright 20111 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and oc eChapter(s).Editocial review has deemed that any suppressed content does not materially affect the overall leaming experience. Cengage Learning reserves the right to remove additional content at any time it subsequent rights restrictions require it. SECTION ONE INTRODUCTORY CASESbeginning July 1, 2010. Also due each July 1, beginning July 1, 2010, was 10% intereston the unpaid balance as of the previous July 1.3. Holton-Central Holdings paid $4,765,000 cash for the assets of Holton-CentralInc., and assumed the firm's $875,000 of accounts payable.July 2, 2009-December 31, 2009Mr. Cardell's first action was to close four furniture showrooms in Chicago, LosAngeles, New York, and Atlanta, because the leases had been cancelled inbankruptcy. These closures would save $950,000 annually; Mr. Cardell believed saleswould decline only marginally. He also negotiated a more favorable labor contractwith former employees, which would save another $750,000 annually. On July 2,2009, the firm reopened for business. The following is a summary of Holton-Central'sactivity for the second half of 2009:1. Paid the $875,000 of accounts payable.2. Paid $154,500 for utilities, professional services, and other administrativeexpenses.3. Paid $1,408,000 for office wages and related payroll taxes and benefits.4. Paid $2,785,000 for selling and marketing expenses.5. Paid $900,000 for production machinery. The machinery was purchased October 1,2009. The machinery had a useful life of five years with no salvage value.6. Paid $228,000 for various one-year insurance policies.7. Purchased $5,345,000 of raw material; $835,000 was unpaid as of December 31, 1998.8. Manufacturing records showed $4,935,000 of raw material transferred to work inprocess.9. Paid $7,878,000 in cash for production wages and charged the costs to work-in-process inventory.10. Charged $6,662,000 to work-in-process inventory for manufacturing overheaditems, including $6,400,000 paid in cash and $262,000 for depreciation onmanufacturing facilities.11. Manufacturing records showed $19,123,000 of work-in-process inventorytransferred to finished goods inventory.12. Sold chairs for $25,563,000. Of that, $4,587,000 had not been paid as ofDecember 31, 2008.13. Manufacturing records showed cost of goods sold of $18,593,000.14. Recorded depreciation expense of $86,000.15. Recorded accrued interest expense.16. Recorded insurance expense of $95,000.17. In late December, Mr. Cardell received a call from Holton-Central's largestcustomer. To cut costs, previous management had substituted a low-grade fabricon 1,800 chairs that the customer purchased in 2008 and 2009. Repairing thosechairs would cost $360,000. Mr. Cardell estimated that customers would requestrepairs to another several thousand chairs, which would cost another $560,000.Although that liability was discharged in bankruptcy, Mr. Cardell believed failureto repair the chairs would irreparably damage the firm's reputation. He notifiedcustomers that Holton-Central would repair the chairs at no cost.18. Computed income tax expense of $365,000 for 2009, payable in 2010.Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s)Editocial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it

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Recording Journal entries in the books of Holton-Central Holdings Inc.

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