You have just begun working at Brandybuck, Gamgee & Took, a mid-size accounting firm that specializes in small business consulting. New employees are assigned to teams of recent graduates that are mentored by an account manager to help new employees through the steep learning curve and build a strong team dynamic. After the orientation, paperwork and welcome lunch with the partners you and your team are anxious to get to work and apply all of the accounting theory that you learned in your program. Your account manager, Jenny Lee, has your team's first assignment. Your team's first assignment is with a new client, Sophia's Simple Soap Company Ltd., whose. controller left during the year due to medical reasons and has not been replaced. The owner's and sole shareholder's nephew created what he calls a comprehensive balance sheet, exhibit A. This document was created from the previous year-end adjusted trial balance that the controller approved right before she left and will form the starting point for the current year. Unfortunately, the nephew also spilled liquid soap on the computer that contained the financial records and lost all of the current and historical data; there is no back-up file. Therefore, while a separate team, lead by Matt Lee, recreates the current-year entries, your team's first deliverable will be to create a set of financial statements for the previous year end, excluding the statement of cash flows that will be created by the team working on the company's cash budget. Once the statements are completed, your team will also prepare a list of balance sheet accounts that may require adjusting entries by using the form found in appendix B. You may wish to use the nephews creation to recreate the adjusted trial balance as a starting point. Your team's second deliverable will be to analyze the transactions detailed in appendix C and create appropriate accounting entries that will be used by the team recreating the current- year financial records; please provide an explanation for each entry. Finally, the team's third deliverable will be to answer the president's questions regarding financial accounting. The questions arose during our initial meeting and are summarized in appendix D. When responding to the president's questions, please keep in mind that she is not a professional accountant and may need more explanation than if your answers were addressed solely to me. Your response should conform to our firm's communication and presentation guidelines using Arial 12 point font with normal margins. All outside sources should be properly referenced in the American Psychological Association (APA) style. Draft financial statements, for review purposes, may be completed and forwarded in Excel and memos should be created using Microsoft Word. Please send your memos to me for review prior to sending them to the client and Matt's team. Appendix A (available in Excel) Assets Cash Accounts receivable Interest receivable Land Building (net of 90,000 depreciation) Equipment (net of 15,000 depreciation) Notes receivable Prepaid expenses Office supplies Inventories Total Assets Sophia's Simple Soap Company Ltd. Comprehensive Balance Sheet Year Ended December 31, 2018 Liabilities Accounts payable Deferred revenue Mortgage payable 8% Bonds payable, due 2021 Interest payable Wages payable Equity Common shares, 25,000 Issued Opening retained earnings Sales revenue Cost of goods sold Selling expense Salaries & wages expense Depreciation expense Supplies expense Property tax expense Income tax expense General & administrative expense Closing retained earnings Total Liabilities & Equity (18,000) 132,000 15,000 800,000 910,000 150,000 7,000 10,000 3,300 138,000 2,147,300 23,300 55,000 476,000 Note 1 600,000 Note 2 48,000 13,000 200,000 350,000 1,345,000 (375,000) (123,000) (250,000) (14,000) (13,000) (36,000) (22,000) (130,000) 732,000 2,147,300 Note 1: Principal payments of $24,000 are due on the mortgage each year. Note 2: Interest on the bonds is payable each January 1st. Note 3: No share transactions took place during the year. Appendix C On December 22, 2019, Soapy Stuff, a long-time customer, purchased $125,000 worth of products to be shipped to its stores on January 2, 2020. The order was paid in full at the time of booking and the cost of goods sold is 40% of the gross revenue. 1. 2. 3. 4. 5. On December 15, 2019, Sophia, the sole shareholder, director and president, approved a cheque voucher to pay her $50,000 with the explanation "owner's drawing". On December 31, 2019, an accident in the warehouse damaged $35,000 worth of inventory; the goods are not saleable or salvageable. Sophia instructed the accounting clerk to leave it until next year". On December 01, 2019, the company negotiated a $500,000 line of credit with RBC. This is in addition to the current line of credit with CIBC. On December 10, 2019, Bubbles & Beyond purchased $65,000 worth of inventory to be shipped to its stores beginning February 01, 2020. Bubble & Beyond paid for the inventory and requested that Sophia's hold the goods on their behalf due to lack of space in their warehouse during renovations. Bubbles & Beyond sent Sophia's a copy of the document that covers the held goods under Bubbles insurance policy. Appendix D The following questions were brought up by Sophia Simmons during the initial client meeting. Please draft a response and include it in your memo with the financial statements. 1. Our company prepares financial statements under Accounting Standards for Private Enterprises or something like that. What is the difference between that other standard, IFRS? Why is everyone so hung up on these standards? 2. The bank wants to see our financial statements each quarter, which I just don't understand. I mean, we're doing well; just look at the size of the company and our brand recognition. Who else might want to see our statements and what possible use could they have with them? 3. My daughter is thinking about setting up a business of her own but I'm not sure that she really needs to incorporate. What are the other options available to her and what. are the differences? How will the financial statements differ from the ones that you are preparing for us? 4. My brother owns Big Bob's Bowling Balls and has his financial statements audited every year. Should we have our statements audited; what's the big deal?