BEACHSIDE VACATIONS INC.

(Suggested Time: 85 minutes)

Blue Sky Travel Inc. (BST) is a travel wholesaler for upscale tropical destinations. It contracts
with Canadian travel agencies to provide BST vacation packages, but does not directly sell
vacations to individuals. BST will contract with any Canadian travel agency it approves; however,
typically there is no geographic exclusivity granted to an agency.

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Travel agencies are considered high risk investments in the market and many traditional lending
agencies will not finance them. When banks agree to lend, they charge very high interest rates
and require significant collateral to be pledged. In response to this problem, BST established a

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program to help finance these investments when there are ownership changes (Appendix I).

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It is now early June 2022. During your first week on the job at an advisory firm, you, CPA, and
your boss received a phone call from Ryan Straiton. Ryan recently entered into a tentative

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agreement (Appendix II) to purchase a travel agency, Beachside Vacations Inc. (BV), located in

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Red Deer, Alberta that has a BST contract. Ryan also advised that he plans to apply for BST
financing and has included information regarding BV (Appendix III) and the most recent BV

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income statement for you to review (Appendix IV).

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After the call from Ryan, your boss requested a preliminary report that includes a qualitative
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assessment of the proposed purchase and whether it is viable using a normalized annual cash
flow analysis. The report should also include a determination of financing available and whether
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it is sufficient for the purchase. You should also discuss other available and relevant financing
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sources. If Ryan resigns from his job with a property management company, he would like to
maintain that same salary of $90,000 with BV to meet his family’s financial needs.
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Ryan also wants to understand what financial and non-financial key performance indicators he
should consider tracking to ensure that the business is operating effectively.
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© 2022, Densmore Consulting Services Inc. All Rights Reserved. 1

 APPENDIX I
DETAILS REGARDING THE BLUE SKY TRAVEL INC. FINANCING PROGRAM

BST will structure the loan agreement so that the debt is incurred by the travel agency. BST loans
are available for ten-year terms with equal annual repayments and charge interest at prime plus
5 percent. The current prime rate is 3 percent.

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BST has established the following guidelines to determine the loan amount available:

• The maximum loan available is calculated based on the most recent financial statements

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as: 75 percent of the following: 1.5 times travel commissions plus 1 times insurance

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commissions.

• The financial statements must be prepared in accordance with IFRS® Standards.

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• The remainder of the purchase price must be financed by the purchaser.

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Prior to extending a loan, BST requires the following:

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A first charge on all assets of the travel agency.
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• The personal guarantee of the owner.
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BST imposes several restrictions during the loan term:

• No additional debt incurred without BST’s permission.

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• No bonuses paid.
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 APPENDIX II
TENTATIVE AGREEMENT TO PURCHASE BEACHSIDE VACATIONS INC.

The major clauses in the tentative purchase and sale agreement are as follows:

• Mary Margarita agrees to sell 100% of the outstanding shares in BV on August 31, 2022 to

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Ryan Straiton for $500,000.

• Ryan has made a refundable down payment of $10,000. The balance of the purchase price
is due in full on August 31, 2022. Ryan must have any financing arranged by this date. (Ryan

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has $100,000 in personal resources to put toward the acquisition.)

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• Mary and Ryan will enter into a separate five-year agreement to rent the BV building, owned
by Mary, to Ryan for $4,000 per month once the purchase closes.

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 APPENDIX III
INFORMATION REGARDING BEACHSIDE VACATIONS INC.

BV gradually developed its business over the last ten years due to Mary’s many contacts in the
travel industry and her close association with many CPAs interested in Caribbean travel. Mary
financed the purchase of the agency using the BST financing described in Appendix I.

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BV offers vacationers a choice of three destinations – Bermuda, the Bahamas and the Cayman
Islands (50 percent of BV customers travel to Bermuda, 40 percent to the Bahamas and
10 percent to the Cayman Islands). The peak travel season for the Bahamas and the Cayman

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Islands is from December to February. Typically, these customers book vacations within three

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months of departure. Bermuda travel is evenly distributed throughout the year and these
vacations are booked six months in advance. As part of its vacation packages, BV also provides
a hotline for customers who experience problems during their vacation. BV’s travel agents are

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responsible for researching vacation destinations to ensure the best experience for the company’s

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customers.

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Mary had plans to expand BV’s travel offerings, beginning in 2023, to include other Caribbean

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destinations such as St. Maarten, St. Lucia and Aruba. Preliminary market research has shown
considerable interest in these upscale destinations, particularly among young professionals
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interested in “showing up” their friends who travel to less affluent countries such as Mexico, Cuba
and the Dominican Republic.
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Mary recently hired an analyst to predict revenues and expenses for fiscal 2023 in anticipation of
the deal with Ryan. As fiscal 2023 will be the first year for the expanded travel offerings, the
analyst predicted increased revenues of 5 percent and increased expenses of 3 percent.
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Additional revenue increases are expected for fiscal 2024. Included in professional fees is
$11,000 paid to the market research analyst.

Ryan would like to focus on ensuring revenues increase within two years. Ryan expects a rate
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of return on his investment of 10%.

During fiscal 2022, BV required some new office equipment that could be bought for $3,000. Mary
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struck a deal with a close friend to provide this equipment in exchange for a free vacation that
had a value of $5,000, which has already been taken. Mary did not record anything related to
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this transaction
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Mary has purchased a condo in the Bahamas. She plans to retire from the travel business and
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teach part-time.
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 APPENDIX IV
BEACHSIDE VACATIONS INC. INCOME STATEMENT

For the year ended March 31 (unaudited)

2022 2021
Revenues
Travel commissions (1) $283,300 $294,460

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Insurance commissions (2) 250,250 244,475

533,550 538,935

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Expenses

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Advertising 8,522 6,610
Amortization 6,767 7,052
Insurance 200,200 195,580

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Interest 331 1,414

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Management salary 100,000 75,000
Office supplies 31,096 26,430

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Professional fees 13,140 2,140

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Repairs and maintenance 2,435 2,400
Staff wages 85,512 77,765
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Telephone 9,493 9,078
Utilities 7,070 6,865
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464,566 410,334

Income before income taxes 68,984 128,601

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Income taxes 8,278 15,432

Net income $ 60,706 $113,169

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1. All travel commissions are recognized at the time a vacation package is booked. Purchasers
are required to pay for vacations in full at the time of booking and the purchase price is non-
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refundable.
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2. Insurance commissions are recognized when insurance is sold. Customers opting for travel
insurance must pay for it at the time of booking and the premiums are non-refundable. The
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rate is quoted by a third party insurance provider based on the traveler’s age, length of travel,
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etc. Insurance commissions equal the total premiums quoted and collected for the policies.
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80% of the premiums are remitted to the third party insurance provider.
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