Assignment
Question 1: Journal Entries and Financial Statements
A friend of yours, Scott Crocker, is the president of Scott's Chocolates Inc. ("Scott's). The company that produces organic chocolates has just completed its first year of operations. The following is the Balance Sheet and other information provided by the bookkeeper:
|
Scott's Chocolates Inc.
Balance Sheet
Year ended October 31,2005
|
|
Account
|
Debit
|
Credit
|
|
Cash in current account
|
$ 3,000
|
|
|
Cash in Washington State bank (Note 1)
|
15,000
|
|
|
Accounts receivable (Note 2)
|
27,500
|
|
|
Inventory (Note 3)
|
95,000
|
|
|
Equipment (Note 4)
|
17,000
|
|
|
Dividends paid (Note 5)
|
30,000
|
|
|
Short term investments (Note 6)
|
15,600
|
|
|
Accounts payable
|
|
$ 46,133
|
|
Demand loan
|
|
9,925
|
|
Amortization of equipment (Note 4)
|
|
-
|
|
Common Shares, 9500 issued
|
|
101,667
|
|
Income for the first year
|
|
45,375
|
|
Totals
|
$203,100
|
$203,100
|
Additional information:
1. Scott's plans to expand into Washington State. The Food and Drug Branch of the United States Government has requested that $15,000 be placed into a bank account in Seattle for a three year period to cover any potential lawsuits against the company arising from the sale of its products in the USA.
2. Accounts receivable are comprised of the following: The accounts owed by customers from credit sales $23,000 Deposits from customers on sales orders (10,500)
Amounts advanced to majority shareholder 15,000
3. The inventory is comprised of the following:
Raw materials at cost to the company $31,000
Finished product at retail selling price 64,000
The company usually earns a gross profit of 25% on its products.
4. The equipment was purchased for $16,000 on November 1, 2004. At the end of the year the same equipment was selling for $17,000. The equipment should last for 6 years and be worthless at that time.
5. The Company paid $30,000 to the majority shareholder for management services rendered. Since the payment was made to a shareholder the bookkeeper recorded it as dividends paid.
6. The excess cash received from the initial issue of the common shares was invested in shares of Canadian Oil Sands Inc., a public company whose shares trade on the Toronto Stock Exchange. The market price of the shares at October 31,2005 was $17,500.
7. The company signed an agreement with the local School Board on August 1, 2005 to provide the school district with chocolates for fund raising events equally over the next 10 months commencing September 1, 2005. On October 1, 2005, the Company received a cheque for $20,000 representing payment for the total contract. The total amount was recorded as revenue.
Required:
a) Calculate income for the year after adjusting for any errors based on the additional information provided above. Ignore income taxes.
b) After making any adjustments in part a, prepare a classified Balance Sheet, in good format for Scott's Chocolates Inc at October 31, 2005.
Question 2: Revenue Recognition
Greek Construction Inc. has been selected as the general contractor for construction of the 2010 Olympic Speed Skating Oval in Richmond. The contract has a fixed price of $5,000,000 and construction costs are anticipated at $4,000,000. The controller of the company explained to the Board that they could adopt either the percentage of completion or the completed contract method in accounting for this contract. The Board decided to adopt the percentage of completion method.
Construction on the Oval commenced in April 2006 and the results of the four-year construction period were as follows:
Dec. 31, 2006 Total costs incurred to date $1,000,000
Estimated additional costs to complete construction $3,000,000
Dec. 31, 2007 Total costs incurred to date (2003 & 2004) $2,750,000
Estimated additional costs to complete construction $2,000,000
Dec. 31, 2008 Total costs incurred to date (2003 & 2004 & 2005) $3,750,000
Estimated additional costs to complete construction $1,500,000
Dec. 31, 2009 Total costs incurred to date $5,250,000
Estimated additional costs to complete construction none - construction completed
Required:
a. Calculate the gross income (construction revenue less costs to construct) Peak Co. should recognize each year of the contract assuming it adopts the percentage of completion method for accounting for this contract.
b) Does the adoption of percentage of completion method in accounting for long-term contracts help ensure the financial viability of the project? Discuss.
c) Recognizing revenue at the time of signing a contract is an alternative for revenue recognition that we have discussed in class. Why did the controller of Greek Construction not mention this method to the Board?
Question 3: Accounts Receivable
Video Electronics Inc. is the largest wholesaler of electronic games is Western Canada. Approximately 85% of the company's sales are made on credit and customers have twenty days from the date of sale to remit payment.
The following information is available for the year ended December 31, 2005:
|
Accounts receivable, gross (1/1/2005)
|
$1,900,000
|
|
Allowance for doubtful accounts (1/1/2005)
|
75,000
|
|
Total sales in 2005
|
15,000,000
|
|
Payments on account received from customers
|
12,500,000
|
|
Write-offs of accounts receivable
|
125,000
|
|
Recoveries of bad debts during the 2005
|
15,000
|
Video provides for doubtful accounts using either of the following calculations:
(i) 1% of credit sales for the year, or
(ii) 5% of current receivables and 25% of receivables which are overdue as at year-end.
As at December 31, 2005, 80 % of gross accounts receivable are current.
Required:
(a) Determine the December 31, 2005 balances in "Bad Debts Expense" and
"Allowance for Doubtful Accounts" if the company uses the percentage of credit sales method.
(b) Determine the December 31, 2005 balance of "Allowance for Doubtful Accounts" if the company uses the aging method.)
(c) Is the "Allowance for Doubtful Accounts" going to be adequate as at December 31, 2005 if the company uses the percentage of credit sales method? Fully explain your answer.
Question 4: Temporary Investments
As at December 31, 2004, Kerrisdale Paints Inc. has the following temporary investments:
|
|
# of shares Cost/Share Market Value/share
|
|
Rose
|
500
|
$43
|
$ 34
|
|
Dogwood
|
200
|
$20
|
24
|
During 2005, transactions relating to this portfolio were as follows:
January 25 Received a dividend of $1.10 per share on the shares of Dogwood
April 1 Purchased 200 additional common shares in Rose for $30 per share plus a brokerage fee of $120
October 31 Sold 300 common shares of Rose for $33 per share less a brokerage fee of $198.
On December 31, 2005, the shares of Rose and Dogwood were trading for $34 and $25 respectively. Assume Kerrisdale Paints has always followed the policy of recording its temporary investments at market.
Required:
(a) Discuss whether the CICA's change to valuing marketable securities at market value is consistent with the accounting principles we have discussed in class.
(b) Provide all of the necessary journal entries that would be required for 2005 with respect to temporary investments.
Question 5: Inventory
In January of 2005,Jacob Distributors (Jacob) signed an exclusive marketing agreement for a palm pilot the size of a credit card. The purchasing and selling information for the year is presented below:
|
|
Units purchased
|
Price per unit
|
|
Purchases
|
|
|
|
February 20
|
1500 units
|
$190/unit
|
|
May 16
|
1800 units
|
$200/unit
|
|
October 11
|
3300 units
|
$220/unit
|
|
December 1
|
1500 units
|
$180/unit
|
|
Sales
|
Units sold
|
Selling Price
|
|
March 15
|
1200 units
|
$350/unit
|
|
June 15
|
2000 units
|
$375/unit
|
|
November 15
|
3000 units
|
$345/unit
|
|
December 15
|
1500 units
|
$325/unit
|
Required:
(a) Calculate the gross profit margin and gross profit margin ratio for the year ended December 31, 2005 using the LIFO, FIFO and Weighted Average methods. Assume a periodic inventory system is used.
(b) Calculate the value of the inventory on December 31, 2005 using the FIFO method? Why would a company adopt this method in costing its inventory?
(c) On December 15, 2005 your competitor introduced a product that appears to be comparable to the palm pilot you are selling at a retail price of only $150. Discuss whether this will affect your financial statements for December 31, 2005.
(d) One of your closest friends has recently opened a new retail clothing store. He approaches you for advice. "You cannot believe how much of an investment I have in inventory. How should I be monitoring the inventory levels at my new store? I seem to have too little of what I need and too much of what doesn't sell." Briefly respond her concern.