ACCT-1071 Case Study #1 - Vera's Magic Garden Ltd. 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 graduate 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 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, Vera's Magic Garden Ltd., whose controller won the lottery and resigned before completing the annual financial statements. Vera's Magic Garden is a destination greenhouse and formal garden specializing in perennials and herbs that operates year- round but only hire staff March through October. Vera Topham, the owner and sole shareholder, has provided an unadjusted trial balance and additional information, Appendix A, and an adjusted trial balance, Appendix B. These documents were taken from the accounting system, and the controller approved them right before she left. Unfortunately, liquid fertilizer was spilled on the computer that contained the financial records and all the current and historical data was lost; there is no back-up file. Therefore, while a separate team, led by Matt Lee, works on the current-year entries, your team's first deliverable will be to create a set of year-end financial statements using the adjusted trial balance, excluding the statement of cash flows that will be created by the team working on the company's cash budget. Your team's second deliverable will be to prepare a set of year-end adjusting entries using the unadjusted trial balance that we will use to support the financial statements. Please provide calculations and an explanation for the adjusting journal entries. Note that Vera's adjusts accounts on a yearly basis. Your team's third 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 your decision on each transaction. Finally, the team's fourth 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 using non-technical language than if your answers were addressed solely to mo. 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. Account Cash Accounts receivable Appendix A (available in Excel) Vera's Magic Garden Ltd. Unadjusted Trial Balance December 31, 2020 Debit (5,000) 145,000 Credit Interest receivable 28,000 Land 813,000 Buildings (net of 80,000 depreciation) 920,000 Equipment (net of 120,000 depreciation) 180,000 Notes receivable 20,000 Prepaid expenses 24,000 Supplies 16,300 Inventories 151,000 Accounts payable 36,300 Deferred revenue 68,000 Mortgage payable 489,000 Loan payable 613,000 Common shares, 25,000 issued & outstanding 213,000 Retained earnings Dividends declared Sales revenue 424,000 25,000 1,658,000 Utilities expense Cost of goods sold Selling expense Salaries & wages expense Property tax expense Insurance expense General & administrative expense 622,000 Note 1 100,000 227,000 36,000 35,000 11.000 153,000 $3,501,300 $3,501,300 Appendix A - Additional Information, year ended December 31, 2020 Based on discussions with Vera Topham 1. The buildings consist of greenhouses, storage sheds and a storefront. All buildings were constructed five years ago and have expected useful lives of fifty years. 2. The equipment was purchased five years ago and has an expected useful life of 10 years. 3. A physical count indicated that there were $300 of supplies on hand at the end of the year. 4. The prepaid expenses relate to a one-year insurance policy purchased July 01, 2020. 5. Deferred revenue relates to a deposit received from a customer for a special order of herbs to be delivered May 31, 2021. 6. 6% interest has accrued on the year-end mortgage balance and is payable on January 01, 2021. 7. 10% interest has accrued on the year-end loan balance and is payable on January 01, 2021. 8. 5,000 common shares were issued in June 2020 to Vera's sister Hazel in exchange for $50,000 cash. 9. $25,000 in dividends were declared and paid in 2020. 10. The effective income tax rate is 25%. Vera's Magic Garden Ltd. Adjusted Trial Balance December 31, 2020 Debit Account Cash Accounts receivable Interest receivable Credit (5,000) 145,000 28,000 Land 813,000 Buildings (net of 100,000 depreciation) 900,000 Equipment (net of 150,000 depreciation) 150,000 Notes receivable 2020,000 Prepaid expenses 12,000 Supplies Inventories Accounts payable Deferred revenue 300 151,000 36,300 68,000 Mortgage payable 489,000 Note 1 Loan payable 613,000 Note 2 Interest payable 90,640 Income tax payable 76,340 Common shares 213,000 Retained earnings 424,000 Dividends declared 25,000 Sales revenue 1,658,000 Cost of goods sold 622,000 Note 3 Selling expense 100,000 Salaries & wages expense 227,000 Utilities expense 36,000 Property tax expense 35,000 Insurance expense 23,000 Depreciation exnense 50.000 Utilities expense Property tax expense Insurance expense Depreciation expense Supplies expense Interest expense General & administrative expense Income tax expense $50,000 of the mortgage is due in 2021. $200,000 of the loan is due in 2021. 36,000 35,000 23,000 50,000 16,000 90,640 153,000 76,340 $ 3,668,280 $ 3,668,280 Cost of goods sold was calculated based on the year-end physical inventory count as follows: Beginning inventory $212,000+ Purchases $561,000- Ending inventory $151,000 = $622,000 5. Appendix C-2021 Transactions 1. On January 15, 2021, The Green Scene, a long-time customer, purchased $25,000 worth of products to be shipped to its store on June 2, 2021. The order was paid in full at the time of booking and the cost of goods sold is 40% of the gross revenue. 2. On January 30, 2021, Vera booked a vacation to Mexico for herself and her sister and paid $10,000 with a company cheque with the explanation "owner's drawing". 3. On March 15, 2021, Vera, on behalf of the company, signed a letter of guarantor with RBC on a loan for her sister to construct and open a tea house on Vera's Magic Garden's property. The tea house will operate as a separate corporation. 4. On March 30, 2021, Herbal Forest purchased $50,000 worth of products to be shipped to its stores beginning May 01, 2021. Herbal Forest paid for the inventory and requested that Vera's hold the goods on their behalf due to lack of space in their warehouse during renovations. Herbal Forest sent Sophia's a copy of the document that covers the held goods under Herbal Forest's insurance policy. The cost of goods sold on this order was $27,000. 5. On April 01, 2021, Vera invested $25,000 of her personal funds in shares of Hazel's Magic Tea House Ltd. Appendix D - Client Questions The following questions were brought up by Vera Topham during the initial client meeting. Please draft a response and include it in your momo with the financial statements. 1. Our controller really left us in a lurch with that lottery win. I had no idea that the records needed adjusting. Can you tell me what these adjustments are for and how to they fit into this "accounting cycle" thing that you keep bringing up? 2. When I went in to sign the letter of guarantor for my sister the bank wanted to know what accounting standards our statements are prepared under. I once heard the controller mention ASPE: so that's what I told them War the Appendix D - Client Questions The following questions were brought up by Vera Topham during the initial client meeting. Please draft a response and include it in your memo with the financial statements. 1. Our controller really left us in a lurch with that lottery win. I had no idea that the records needed adjusting. Can you tell me what these adjustments are for and how to they fit into this "accounting cycle" thing that you keep bringing up? 2. When I went in to sign the letter of guarantor for my sister the bank wanted to know what accounting standards our statements are prepared under. I once heard the controller mention ASPE; so, that's what I told them. Was that correct? What other standards are there, and should we use them? 3. On the topic of accounting standards, what is the point for a small operation like mine to have financial statements? I know what is going on day-to-day, but would anyone else want to see these things?