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Happy ReLeaf Ltd

1

2018 was a lucky year for Penelope Wildflower! She was one of the first Canadians awarded a

license for a cannabis retail outlet in Ontario. Penelope has always been an avid supporter of

alternative medicine. In recent years,

she has kept

current on

the in

creasingly published

health benefits of cannabis use.

With the

opioid addiction and overdose crisis in many parts of

the country, she welcomed the legalization of cannabis on October 17, 2018 along with the

financial opportunity to run her own business in

a field she was passionate about!

Penelope incorporated

Happy ReLeaf Ltd (HRL)

in 2018 to operate her cannabis retail

outlet. HRL completed its first fiscal year on October 31, 2019. As a Canadian

-

controlled,

private corporation, HRL follows ASPE.

Consis

tent with many other cannabis companies, HRLs first year results did not meet

Penelopes expectations. Given the business challenges requiring her time and attention,

Penelope hired her nephew, William Weederful

, to act as

HRLs controller. He has a diplo

ma

in project management and is going back to school in the fall to obtain a business degree.

What

a fortuitous opportunity

! Penelope thought. William will gain great practical

experience while helping me during this busy time,

she

mused

.

Based on the

first three months ended January 31, the outlook for 2020 looks promising!

With the legalization of cannabis alternatives on October 17, 2019, HRL is seeing new

customers and fresh sales! In addition to the regular dried cannabis flower, HRL is now

offerin

g edibles, beverages, capsules, and lotions.

The new influx

of business has

left William

scrambling

to catchup on the accounting for the first quarter of 2020. Penelope has hired

you

r

CPA

firm

to help William complete the monthly accounting for January 202

0, draft HRLs

financial statements for the quarter ended January 31, 2020 and provide some additional

advice.

Your partner has assigned you

, Accounting student,

to HRLs account.

The volatility in 2019 scared investors away. HRL turned to bank financing

to deal with the

lack of stable cash flow

and profitability in such a new industry. Going forward, Penelope

wants to impress HRLs current lenders and potential future investors. She wants her

financial statements

to depict a growing, profitable business i

n 2020 compared to 2019. She

also asked William to monitor closely HRLs current ratio and any changes that might impact

it. Penelope has learned that it is a factor

that will determine HRLs access to future financing

with her bank.

In order to increase b

usiness, HRL introduced a new online ordering system effective

November 1

st

, 2019. In addition to walk

-

in retail sales, HRL can now accept orders online for

pickup or delivery. Details regarding online orders are provided in

Exhibit A

.

William has been

rec

ording online sales

revenue

on the date the order

is

placed.

Penelope wants your advice

regarding the new online system and Williams approach

to

recording sales.

She is not sure

about the timing that these sales are recorded as revenue.

Specifically, com

ment on whether

Williams

revenue recognition policy

is acceptable, suggest an alternative method, and

describe the impact a change to the alternative method would have on HRLs current

ratio.

Happy ReLeaf Ltd

2

Required:

1.

Prepare the necessary journal entries (including adjusting journal entries) for January

31,

2020

, their quarter end (November

January 31)

. Include appropriate descriptions

for each journal entry. William has provided the

balance sheet and inc

ome statement

for year

-

ended

Octob

er 31, 2019 (

Exhibit B

) and a list of the business transactions for

the first quarter ended

January

31,

2020 (

Exhibit

C

).

2.

Prepare the Statement of Financial Position, the Statement of Retained Earnings, and

the Statement

of Earnings for the quarter ended January 31,

2020.

3.

Prepare a professional memo directed to Penelope Wildflower. The memo must

address Penelopes specific requests regarding HRLs method of recording sales from

the new online ordering system. Use format p

rovided (

see Exhibit

D

)

Happy ReLeaf Ltd

3

Exhibit A: Online Ordering System

HRL introduced an online ordering system effective November 1

st

, 2019. The following terms

apply to all online orders:

1.

Legal

requirements stipulate that

HRL cannot sell cannabis products to anyone under

the age of 19. Accordingly, there is a strict

identification check on all pick

-

up and

delivery orders

. Only individuals aged 19 or older are

eligible individuals

. Pursuant

to the licensing agreement,

if

HRL fails

to document

identification checks it

will result

in HRL

losing its operating license upon completion of government

audits.

2.

Inventory is reserved

and a confirmation number is generated

at the time of

the

online

order. As a result, customers are n

otified immediately if items are out of

stock.

3.

Payment for online orders depends on whether it is an order for pick up or delivery. Pick

up orders can be paid online at time of order or in store at time of pickup. All delivery

orders must be paid online

and in full

at the time of the order,

before shipment.

A

3%

discount

is offered on

all online

orders

, both pick up and delivery,

which are

paid in full

online.

4.

Returns

are permitted for any unopened merchandise in

the

original packaging.

The

returns are refunded in the original form of payment.

Pick up Orders

Individuals picking up their order must produce the reservation confirmation number

and

a

government issued

identification.

Orders

not

picked up

within 48 hours of the order date a

re

cancelled

orders. They will

be re

turned to the shelves

(restocked)

and

used

to fill the

next online

order

.

Delivery Orders

Orders placed by 4 pm are delivered the next

day.

Orders must be accepted by eligible individuals. Orders are not left in

mailboxes.

If no eligible individual is available to accept the delivery, o

rders are returned to

the

store

. Customers have

24 hours

to pick up the order from the store.

After 24 hours,

they are considered

cancelled

orders. They will be restocked and

used

to fill

the next

online

order.

Happy ReLeaf Ltd

4

Exhibit B: Financial Statements October 31, 2019

Happy ReLeaf Ltd.

Income Statement

Year Ended October 31, 2019

$

In

-

Store Sales

709,095

Sales return

(12,074)

Net Revenue

697,021

100.0%

Cost

of Goods Sold

413,714

59.4%

Gross Margin

283,308

40.6%

Depreciation

5,609

0.8%

Management Fee

50,215

7.2%

General and administrative

40,445

5.8%

Marketing

9,940

1.4%

Salaries

33,573

4.8%

Equipment rental

6,446

0.9%

Legal fees

8,809

1.3%

Supply

2,781

0.4%

Total Expenses

157,818

22.6%

OPERATING INCOME

125,490

18.0%

Other income

1,743

0.3%

NET OPERATING INCOME

127,233

18.3%

Income Tax @35%

44,531

6.4%

NET INCOME

82,701

11.9%

Happy ReLeaf Ltd

5

Happy ReLeaf Ltd.

Statement of

Financial Position

October 31, 2019

$

$

ASSETS

LIABILITIES

Current assets:

Current liabilities:

Cash

232,831

Trade payables

150,802

Accounts receivable

24,894

Other current liabilities

102,209

Prepaid expenses and deposits

32,136

Inventory

202,151

Total current assets

492,012

Total current liabilities

253,010

Non

-

current assets:

Non

-

current liabilities:

Property, plant and equipment

39,298

Notes Payable

29,989

Accumulated Depreciation

(5,609)

Total

non

-

current assets

33,689

Total non

-

current liabilities

29,989

SHAREHOLDERS EQUITY

Share capital

160,000

Retained Earning

82,701

Total shareholders' equity

242,701

Total assets

525,701

Total liabilities and

shareholders

equity

525,701