Case Study 1

Maria Vasquez was sitting with her friend Wanda in her office at Microcell Inc., a small family business based just outside San Juan on the island of Puerto Rico. Wanda is the CEO and she had invited Maria down to have a tour of the factory and to discuss her small problem.

Yes, I have some knowledge of accounting, stuttered Maria.

That is good. I thought that you might be able to help, continued Wanda. The difficulty that we face is that Sergio Alcacer, our financial controller, is on paternity leave and will be off work for a few months and I was hoping that you might be able to fill the gap. Your MBA course covered accounting, did it not? You could substitute for Sergio until he returns.

Specifically, Microcell Inc. needs to have its accounts for the quarter to 28 February 2021 prepared.

Maria groaned inwardly it had been so long since she had studied for her MBA that she was struggling to remember what to do but she did not want to let her friend down.

All right, then, she found herself saying. I will do it.

Maria went to the administration office to acquaint herself with the companys accounting records and found the accounting equation prepared at 30 November 2020.

At 30 November 2020, the accounting equation had been as follows:

Machinery $110,000		Share Capital $150,000
+ Raw Materials Inventory $7,200		+ Creditors $39,775
+ Finished Goods Inventory $41,620	=	+ Retained Profits $47,605
+ Debtors $56,215
+ Cash at Bank $22,345

During the three months to 28 February 2021, the following transactions had occurred, all of which Maria requires to process:

1. Machinery costing $16,000 had been purchased, 75% for cash and 25% on credit.
2. Payments of $21,000 were made to creditors.
3. 50% of the raw materials inventory had been converted into finished goods, incurring

$3,000 of direct wages paid.

4. Cash of $41,800 had been received from debtors.
5. Raw materials were purchased for $4,000 on credit.
6. Finished goods, costing $22,000, had been sold for $38,000, on credit.
7. Rent of $12,000 had been paid for the year to 30 November 2021.
8. Administration salaries of $17,500 had been paid.
9. Shareholders had subscribed, in cash, for $50,000 in $1 ordinary shares.
10. Finished goods, costing $28,000, were sold for $40,000 in cash.
11. The remaining balance of raw materials inventory had been converted into finished goods, incurring $5,100 of direct wages paid.

As she begins to prepare the financial statements, Maria realised that further adjustments will require to be included for the following items (none of which have been included within the financial records):

1. Finished goods inventory of $2,500 had been damaged and requires to be written off.
2. An electricity bill for $3,300 has been received for the quarter to 28 February 2021.
3. Depreciation on machinery is to be provided for the quarter at a rate of 10% per annum (based on net book value at 28 February 2021).

Required

1. Prepare the accounting equation as at 28 February 2021 in a tabular format, detailing all the transactions for the quarter and incorporating the various adjustments identified by Maria.
2. Prepare the Profit and Loss Account for the quarter to 28 February 2021.
3. Prepare the Balance Sheet as at 28 February 2021.