ACC571_Final Project Pyramid Holdings Limited Contributed by Jeffrey Botham and Bruce J. McConomy Lazaridis School of Business & Economics, Wilfrid Laurier University Pyramid Holdings Limited (PHL) is a private company based in Winnipeg, Manitoba, that offers storage solutions, such as shelving units and organizers, to a variety of business clients. Joan Chen has been the bookkeeper for PHL for several years, and prepared a preliminary trial balance for the fiscal year ended March 31, 2017 (Exhibit I). The company chose a March year end to coincide with its business cycle. The company's owner, James Steel, has been thinking of taking the company public in three or four years and would like to ensure the financial statements are attractive to potential investors. When Joan Chen presented Jim with the preliminary trial balance for the 2017 fiscal year, a number of things struck him as being not quite right. Joan is not a CPA, so Jim prepared a list of items for follow-up with the auditor to make sure they are dealt with correctly (Exhibit II). During a heated discussion with Joan about several of the contentious issues on the list, Joan walked out of the meeting and quit before preparing PHL's final trial balance and financial statements. You are the replacement bookkeeper assigned by the ABC temp agency to help PHL prepare financial information for the auditor. You are currently completing your business degree in the evenings, and hope to write your CPA examinations in a year or two. The auditor will be arriving in a week. Jim offered to hire you as a full-time replacement, once your two-week assignment as a temporary bookkeeper is up, as long as you can \"make the numbers look good\" for him and the company. He indicated that he expects that when the company goes public, he will be able to pay you a $6,000 bonus \"if you can get the job done right.\" By coincidence, $6,000 is the exact amount you owe for your student loan, so it would come in quite handy! You were able to call Joan, who provided you with some additional information (also in Exhibit II) be fore she left on a six-month trip to \"parts unknown\" where clearly, she does not want to be contacted again. Required PHL follows ASPE, and Jim has instructed you (and the auditors) to use the simplest methods allowed for PHL's financial statements. (Note: round all calculations to the nearest dollar.) (a) Prepare all adjusting entries required for the March 31, 2017, financial statements and also include them in an adjusted trial balance work sheet. (b) Jim would also like you to prepare a draft statement of financial position and draft income statement for discussion with the auditor. For purposes of calculating tax expense for the draft financial statements, you can do what Joan has done in prior years: ignore the impact of any timing differences and assume that accounting income equals taxable income. (The auditors will provide a more specific estimate in a few weeks.) (c) Jim is also hoping that you can briefly summarize the requirements of \"going public\" for him, so that he will be prepared to discuss this with the auditors. (He specifically said you do not have to \"run the numbers\" for going public, he just wants to have an overview of the requirements of going public, including whether it will have any impact on PHL's accounting policies.) There is no need to do an extensive report on the impact of going public in a few years, because Jim is relying on the auditors to provide that analysis separately next year. Exhibit I- Financial Statements Joan's Notes (see also Exhibit II) Remember to ask auditor about the shareholder loan and repayment. Professional fees for audit and going public? What to accrue for payroll that will be paid covering March 28 - April 8, 2017, for $10,000? (The $10,000 covers all employees, and the standard work week is Monday-Friday, with paydays occur ring every second Friday.) EXHIBIT II - ITEMS FOR FOLLOW-UP WITH AUDITOR The following is a list of items for follow-up with the auditor compiled by Jim. It includes information pro vided by Joan to you. PHL purchased a used delivery truck for $10,000 on July 1, 2016, and it was expensed as part of Vehicle Expenses. The lease payments for the company car, used mainly by the VP of sales for visiting clients, are in correctly recorded under VehiclesLeased. The monthly payments are $400 and began on May 1, 2016, for a three-year lease. (Note: only the first 10 months of payments had been made by March 31, 2017.) If PHL had purchased the car, it would have cost $30,000. The car has an expected useful life of six years. The company's heat, electric, water, and related utility bills had not been received when Joan pre pared the financial statements, so she accrued a total amount of $1,000 for the three bills in the trial balance. When the final invoices arrived, the cost actually totaled $2,500, due to an extremely cold winter and repairs needed to a frozen water pipe. In addition, there was $10,000 damage (to carpets and so on) due to the flooding caused by the frozen pipe. Joan did not record the $10,000 amount disbursed because it should be covered by the company's insurance policy. There is an $800 deductible on the insurance claim that remains outstanding and will be deducted from the reimbursement from the insurance company. ATL Bank had loaned the company $20,000 during the first week of the 2016-17 fiscal year, and the company made a payment of $5,000 to the bank on November 1, 2016. Joan admitted she had not recorded the payment, and was going to speak with the auditor about it when they came in for the year-end audit. The bank charges 6% interest on the loan, but Joan did not record any interest because she did not consider it material. ATL charges its usual prime plus 1% (that is, 6%) on the loan, with the interest due on the anniversary date each year. The $20,000 amount is included on the trial balance in Accounts Payable. The audit fee was estimated at $25,000. However, the audit firm has indicated that it will charge an additional $20,000 to help prepare an initial consulting report regarding factors to consider when Jim eventually takes the company public. The audit firm estimates that the consulting report and related work was \"90% complete\" on March 31, 2017. Neither of these items have been recorded in the trial balance. A shipment of inventory valued at $1,500 was shipped by a supplier on March 28, 2017, scheduled to arrive at PHL on March 30, 2017, but it arrived on April 3, 2017. It was delayed because it was shipped by truck and got caught in a snowstorm. The shipment was FOB shipping point. Joan re cords shipments based on the arrival date at the company's warehouse and therefore no entry had been made to include the inventory. Of course it was also not included in the physical count that took place on March 31, 2017, as it was not present for warehouse personnel to count. The company has not performed a detailed analysis of its allowance for doubtful accounts since the auditors were in last year; it was $5,600 at March 31, 2016 (before any accounts receivable were writ ten off during the 2016-17 fiscal year). Joan booked a preliminary estimate of $3,600 of bad debts for fiscal 2016-17, because she did not know how the amount recorded in 2015-16 was calculated. Joan knows that the auditors like to see an aged accounts receivable schedule on the first day of their audit, so she has prepared one (Exhibit III). Joan took a week off between March 24 and March 31, and the invoices for new office furniture purchases that came in during that period totaled $15,000 and were recorded in inventory by her assistant. The office furniture had arrived at PHL on March 1, 2017, and is expected to last 10 years. Joan and her assistant attended the inventory count at the main warehouse. Similar to March 31, 2016, the owner assured her that there was \"$50,000 of good inventory\" at Warehouse #2, a ware house in Brandon, Manitoba, that is rented from the owner (Jim's father) at a cost of $2,000 per month. Joan never verified the existence of the inventory, nor had she (or the auditors) even been to the warehouse. The cost of the goods purchased was \"paid for\" by the note payable that appears on the trial balance. The note is non-interest-bearing, so Jim says he is in no hurry to pay it. The $50,000 of inventory was originally purchased on December 31, 2014, according to Jim. PHL uses straight-line depreciation for all of its property, plant, and equipment other than vehicles (where double declining-balance depreciation is used). Aside from the items discussed above, there were no additions or disposals during the year. Property, plant, and equipment items are estimated to last for 10 years, and vehicles for five years. Joan had not recorded any depreciation expense for the 2016-17 year before she quit. However, depreciation charges prior to 2016-17 have been audited and were done correctly. Jim had arranged a special deal with one of his best customers (BCL) on October 1, 2016. The deal allowed the customer to purchase $22,000 (cost) of inventory for a price of $35,000. The \"special\" part of the deal was that BCL would not have to make any payments on the $35,000 outstanding amount for the goods until October 1, 2020. In addition, BCL would only be charged 2% interest on the amount outstanding to be paid each year on October 1. BCL was quite pleased with this deal because it has a bit of a cash flow problem, so BCL's bank charges it prime plus 3% (8% annually) instead of the 6% charged to PHL. Joan recorded the sale of $35,000 and the cost of goods sold of $22,000 in October 2016, but was unsure if other entries were needed. PHL pays tax at a 25% tax rate, and Joan had told Jim that based on her discussions with the auditors, \"once again there are no permanent differences, so under ASPE taxes are pretty simple to calculate.\" Joan left before estimating the tax expense for fiscal 2016-17. However, she sent a cheque to the Canada Revenue Agency for $20,000 on March 15, 2017, because that was the tax expense from fiscal 2015-16, and so it was her best guess as to how much PHL will owe in taxes for fiscal 2016-17. However, she did not record the $20,000 payment before she left. When Joan provided Jim with the preliminary trial balance (Exhibit I), she included a few questions for the auditors at the bottom of the trial balance. You hope to be able to impress Jim by also dealing with these questions before the auditors arrive