Reference no: EM132964186

Titans Mechanical Incorporated is looking to expand its manufacturing facilities and buy more equipment to meet increasing customer demand. The company's strategy is to build an add-on to the current facility and bring in new equipment that will increase the efficiency of the production line and subsequently phase out the old, less efficient equipment in the current facility. While the new facility and equipment are being constructed, the current facility will continue to manufacture the product to meet the current demand. However, the company has experienced some cash flow difficulties, due to delays and non-payments from its largest customer. The company also has a debt-to-equity ratio stipulated by Colts Bank for its current line of credit of 1:2. As a result, Titans Mechanical has been reluctant to expand, because it would require additional debt financial, worsening the debt-to-equity ratio and increasing its cash flow demands.

• The president of Titans Mechanical, Jeremy Flowers, approached the president of Texans Production, its major customer, and asked for prompt payment of all outstanding accounts. Jeremy indicated that Titans cannot continue to fund Texans' cash flow, and it would not sell any more products until all amounts are paid. Texans' president apologized for the delayed payment, saying it was not intentional. Texans had issues with its controller, who are recently fired, and Texans would make all payments the next day. Jeremy also mentioned the company's cash flow issues, and Texans' president said he may be able to help. After some discussion, a two-part plan was worked out. First, Texans would build the additional facility next to Titans' current facility, and the plant would initially belong to Texans. Second, Titans would sign a 20-year lease agreement to lease the facility from Texans. The lease payment would be based on a flat amount plus a percentage of the additional revenue earned through the new facility. After 20 years, Titans would buy the facility from Texans for 1.2 times the market price at the time.

Problem 1: Adopt the role of the controller and discuss the financial report issues.