Chartered Professional Accountants of Canada, CPA Canada, CPA are trademarks and/or certification marks of the Chartered Professional Accountants of Canada. 2017, Chartered Professional Accountants of Canada. All Rights Reserved. Module 5.1 Intermediate Financial Reporting 1 Project 1 Module 5.1 Intermediate Financial Reporting 1 2 / 7 PROJECT 1 (40 MARKS) Millwork Inc. is a residential and commercial cabinetry company located in Edmonton, Alberta. Since its incorporation six years ago, Millwork has grown consistently each year to become an industry leader in the cabinetry market. The two shareholders, John and Genevieve, take pride in their high-end, custom cabinetry products. Millwork's new bookkeeper, Rob, is preparing the company's financial statements for the year ended December 31, 20X5. You are a CPA and a consultant for Millwork. The shareholders hope to take the company public at a later date and would like to have the financial statements prepared in accordance with IFRSs this year. Rob is seeking your assistance in preparing the year-end statements. He has provided you with a trial balance and some information on the financial accounting transactions that he needs assistance with recording. Required: 1. Write a memo to discuss the revenue recognition issues that arose in 20X5 and provide a recommendation on the appropriate accounting treatment to adopt. If revenue was accounted for correctly, indicate this as well and explain why. (Hint: Use the five-step framework outlined in the notes and in IFRS 15 to help you prepare the memo.) (7 marks) 2. Perform the following tasks (33 marks): Adjusting journal entries: Assist Rob by preparing all necessary adjusting journal entries for the year ended December 31, 20X5. Journal entries should be properly formatted with explanations of why the adjustment is required (if it is not explained in the memo you prepared in Part 1) and a brief explanation of how any calculations were completed (if calculations are not already covered in the supporting schedules). Number the journal entries following the number of the situations. If a situation requires more than one adjusting journal entry, label it as 1a, 1b, for example. (Note: Do not include the original posted journal entries in your submission.) Prepare the supporting schedules for the following: o Note receivable o Allowance for doubtful accounts o Construction-in-progress o Inventory o Bank reconciliation Module 5.1 Intermediate Financial Reporting 1 Project 1 3 / 7 Prepare the adjusted trial balance based on the journal entries made in Part 2, using the worksheet format. An example of the worksheet format follows: Prepare financial statements in proper form for Millwork. This should include a statement of financial position, statement of comprehensive income, and statement of changes in shareholders' equity. Following is relevant information for Millwork: Millwork Inc. Trial balance As at December 31, 20X5 Debit Credit Cash 158,560 Accounts receivable 124,600 Prepaid insurance 5,500 Inventory 78,540 Contract asset 20,710 Billings 15,000 Note receivable 10,850 Land 190,000 Building, vehicle, and equipment 1,102,560 Accumulated depreciation building, vehicle, and equipment 853,850 Accounts payable 82,700 Accrued liabilities 56,500 Current portion of long-term debt 27,200 Long-term debt 240,000 Preferred shares (100 shares outstanding) 50,000 Common shares (200 shares outstanding) 100,000 Retained earnings 151,043 Sales revenue 1,302,800 Cost of goods sold 763,460 Advertising 4,800 Bad debt expense 5,400 Bank charges 300 Depreciation expense 72,644 Gain on sale of truck 3,450 Interest expense 20,900 Insurance expense 14,400 Office expenses 34,800 Professional fees 8,030 Training and development 3,600 Wages, salaries, and benefits 236,646 Income tax expense 26,243 $ 2,882,543 $ 2,882,543 Account DR CR Ref DR CR Ref DR CR DR CR DR CR Adjusted Trial Balance Statement of Financial Position Statement of Unadjusted Trial Balance Adjustments Comprehensive Income Module 5.1 Intermediate Financial Reporting 1 Project 1 4 / 7 Additional information: 1. On June 1, 20X5, Millwork paid $14,400 to renew its one-year general insurance policy, effective the date purchased. Insurance expense was debited for this premium. Millwork paid $13,200 last year. 2. On March 1, 20X5, Millwork sold an old delivery truck that it no longer needed and took a two-year note receivable for $10,850 from the customer, a friend of John. The note bears interest at 4%. The interest is to be paid annually on March 1. The market rate for the note is 8%. The book value of the truck sold was $7,400. Rob has recorded a gain on sale for $3,450. 3. On September 5, 20X5, Millwork purchased and recorded a new machine for $65,400. The estimated useful life for the machine is 12 years with an $8,000 residual value. No depreciation expense has been recorded yet. Millwork uses the straight-line method, prorated for the months owned. 4. During the year, Millwork recorded bad debt expense of $5,400 as accounts were written off. Rob is not sure whether he should continue to follow this policy. All of Millwork's sales are credit sales on a 30-day collection policy. Historical records indicate that, based on accounts receivable (A/R) aging, the following percentages will not be collected: A/R balance Percentage estimated to be uncollectible 0-30 days outstanding $80,680 0% 31-60 days outstanding 20,120 5% 61-90 days outstanding 13,800 10% Over 90 days outstanding 10,000 25% 5. Millwork's products range from small residential projects to large commercial jobs. The length of its projects usually range from one to 10 months. Customers pay a deposit at the beginning of the project, and then Millwork bills them on a monthly basis as the projects progress. On December 31, 20X5, Millwork has the following jobs in progress: Job #133: Millwork started this job for a contract price of $34,900 in 20X4. Revenue and costs were properly recorded in 20X4. Details of the job are as follows: 20X4 20X5 Costs incurred during the year $15,220 $15,480 Estimated costs to complete 10,428 Billings during the year 15,000 19,900 Collections during the year 15,000 19,900 Rob recorded $19,900 for revenue and $15,480 for cost of goods sold for the work done in 20X5. Module 5.1 Intermediate Financial Reporting 1 Project 1 5 / 7 Job #188: This job is for a commercial client to furnish the cabinets and front desk of a 12-storey, four-star hotel. On August 1, 20X5, Millwork signed the contract for a fixed price of $460,500 with a performance bonus of $10,000 if the contract is completed by April 30, 20X6. The contract requirements are similar to contracts that Millwork has performed previously. John and Genevieve estimate that there is a 75% probability that the contract will be completed by the agreed-upon date, a 15% probability that it will be completed one week late and a 10% probability that it will be completed two weeks late. The contract price includes installation. Millwork would have signed the contract for $440,000 plus the bonus without installation. Other companies can also perform the installation for a price of $34,000. However, the client chose to use Millwork for the installation so that it did not have to hire a second company. Additional information for the contract follows: 20X5 Costs incurred during the year $ 150,470 Estimated costs to complete 185,000 Billings during the year 230,250 Collections during the year 172,800 Rob has not recorded anything for this job yet. Job #222: This job is a residential order made directly with a homeowner for a total contract price of $36,800 to construct a 40-foot maple decoration wall from the basement to the ceiling along the stairs. The contract price includes installation. The customer paid a $9,000 deposit on November 25, 20X5. The job is expected to be completed by March 31, 20X6. Since this project is highly customized, no company other than Millwork can perform the installation. The costs incurred to date total $8,400, and the estimated costs to complete are $14,600. Rob has recorded the $9,000 payment received as revenue and $8,400 as cost of goods sold for 20X5. 6. In September 20X5, Millwork provided a set of office cabinets for T&M LLP in exchange for legal services. The market value of the cabinet is $5,250 and the value of the legal services is $5,500. Rob has recorded the transaction as follows: DR Professional fees 5,250 CR Sales revenue 5,250 7. On December 15, 20X5, Millwork completed a job for a total price of $24,800. The custom cabinets are to be delivered on December 18 as originally agreed on the contract; however, there is a delay in the construction of the house and the customer is asking Millwork to hold the delivery until January 25, 20X6. Title passes to the customer on December 18. On December 15, Millwork received payment and recorded revenue for $19,840 on this contract. On December 18, Millwork sent an invoice to the customer and recorded the following journal entry: DR Account receivable 4,960 CR Sales revenue 4,960 Module 5.1 Intermediate Financial Reporting 1 Project 1 6 / 7 8. Millwork maintains a general ledger account for each class of inventory. The following transactions relate to the raw materials inventory account in December: a) An invoice for $4,990 was received and entered in the inventory account on December 27, 20X5. The term of the purchase is FOB destination. The materials were shipped on December 20, 20X5, and received on January 5, 20X6. b) Materials for a price of $1,350 were received on December 22, 20X5. No entry was made, as the invoice (term FOB destination) was not received until January 4, 20X6. c) An invoice for $2,220 was received and entered in the inventory account on December 30, 20X5. The term of the purchase is FOB shipping point. The materials were shipped on December 22, 20X5, and received on January 3, 20X6. 9. Millwork has the following items in its raw inventory at December 31, 20X5, and does not group similar inventory items together. Millwork Inc. Raw materials inventory As at December 31, 20X5 Cost Net realizable value Wood panels Ash $ 2,620 $ 3,205 Birch 3,480 2,890 Cherry 8,450 9,540 Maple 4,640 5,450 Oak 6,800 7,600 Pine 4,500 3,450 White melamine 8,200 6,450 Birch plywood 9,670 7,840 Total panels $48,360 $ 46,425 Plastic laminate $ 8,700 $ 12,050 Hardware Door catches $ 1,200 $ 1,050 Drawer slides 2,300 1,860 Hinges 3,400 3,480 Knobs and pulls 2,650 1,670 Screws and nails 1,230 840 Total hardware $10,780 $ 8,900 Lacquer $ 9,650 $ 9,900 Other supplies $ 1,050 $ 860 Total raw materials $78,540 $ 78,135 Module 5.1 Intermediate Financial Reporting 1 Project 1 7 / 7 10. Following is a summary of Millwork's December 31, 20X5, bank statement: Disbursements Receipts Balance December 1, balance $161,815 Deposits $74,560 Bank loan direct payment $2,265 Interest expense 1,450 Cheques cleared 79,625 Service charges 25 December 31, balance 153,010 Deposits in transit at the end of the month were $14,500. Cheques outstanding totalled $12,600. One cheque paid to the advertising agency was recorded as $1,879, while the bank correctly cleared it for $1,789. 11.Millwork paid a cash dividend of $60,000 in December. This was properly recorded.