Alpha Classic Car Restorations

John Wallace is an automotive enthusiast. He has over $25$ years of experience as a mechanic for the dealership of a large car manufacturer in Oakville. John also gained experience doing minor body work and painting.

Recently, John decided to retire from the car dealership and pursue his interest of restoring classic American muscle cars. Accordingly, John started Alpha Classic Cars Restoration $($ACCR$).$ John leased an industrial building and converted it into a repair and body shop. The building$$s land has a small parking lot that is used to showcase the restored vehicles that are for sale.

Generally, John selects the classic muscle cars that ACCR will restore and then places them for sale to the general public in the lot. John also posts his vehicles to various Internet sales sites, frequents car shows, and uses the clas$-$ sifieds of local newspapers to market his inventory. ACCR also takes custom jobs, whereby an individual can request the car to be restored.

ACCR has a December $31,2020,$ year end, and just completed its first year of operations. John had a friend help him compile financial statements for the year end $($draft financial statements can be found in Exhibit I$).$ ACCR$$s bank requires the preparation of annual audited financial statements in accordance with IFRS $($details of the loan agreement can be found in Exhibit II$),$ and the auditors are scheduled to commence year$-$end work on January $18.$

Realizing that ACCR needs accounting assistance, John has hired you, CPA, as a consultant on December $24,2020.$ Your first task is to review the draft financial statements and provide any recommendations to comply with IFRS. In addition, John required some assistance preparing a statement of cash flow. John has provided you with a file for review, which outlines all of the significant transactions that have taken place during the year $($Exhibit III$).$

Aside from the year$-$end statements, John would also like to know whether he will be able to pay any dividends in the current year. He has drawn a minimal salary, and is hoping to supplement his income by paying a $$35,000$ dividend with the current cash balance.

Finally, John has asked you to provide some advice regarding the additional controls or procedures that could be implemented to improve the day$-$to$-$day operations of the company.

Required

John has asked you to prepare a report that discusses all of the material accounting issues $($i$.$e$.,$ identify the issues, discuss the implications, offer alternative treatments, and provide a recommendation$).$ Revised financial statements should be included in the report. The report should also address John$$s other concerns. Provide journal entries, where appropriate.

SECTION V

$113$

Alpha Classic Car Restorations $115$

Income Statement

Bank Loan Agreement

The Bank of Toronto has provided a $$300,000$ loan to help finance working capital and capital assets. The following are the terms and conditions of the loan.

$$ Security: The bank secures its loan with a first claim against inventory and accounts receivable.

$$ Repayment: The loan is to be repaid over a $10-$year period, with blended monthly payments.

$$ Interest rate: The rate of interest is $6\%,$ effective annual rate $($EAR$).$

$$ Covenants: ACCR must comply with the following covenants:

$$ The current ratio must not be below $2$:$1.$

$$ The debt to equity ratio must not exceed $3$:$1.$ Debt is defined as both current and long$-$term liabilities.

A violation of either covenant will result in the loan becoming payable upon demand.

$$ Financial statements: Audited financial statements are to be presented no later than $60$ days after year end. Financial statements can be prepared with ASPE.

Notes of Significant Transactions

$$ During the first year of operations, ACCR made the $$ The building and land have fair values of $$170,000$ and

following sales: $$56,667,$ respectively.

$$ The building has a useful life of approximately $13$ years.

$1.1972$ Chevy Camaro, Z$28$ $$45,000$ The lease payments were set to provide the lessor with a return

$2.1978$ Chevy Corvette Coupe, $25$th Anniversary $$33,000$ of $60\%$ related to the building and $40\%$ related to the land.

$3.1969$ Pontiac GTO

$4.1967$ Ford Shelby Mustang $$38,000$

$$55,000$ There is no bargain purchase option, or renewal option, at the

end of the lease.

$5.1974$ Dodge Dart

$$33,000$ The capital asset breakdown is as follows:

Capital Assets Cost

Accumulated Depreciation

Net Book Value

Machinery

and equipment

$$250,000$ $$15,500$ $$234,500$

$$ ACCR is so confident in its workmanship that it offers a $10-$year Leasehold $10,0001,0009,000$

bumper$-$to$-$bumper warranty with all car sales. The warranty covers all defects and breakdowns that are not directly related to improvements

Office equipment

$25,000$

$3,125$

$21,875$

regular wear and tear. John is unsure of how much the warranty will cost to s