Comprehensive Case Study - Chapters 1-4

Razul and Amy decided to start a partnership called SA Consulting on January 1, 2020. SA Consulting assists business owners with their accounting needs. Each partner contributed a number of items to the partnership, which are listed below. All tangible assets are listed at their market value.

2020 RazulAmy Cash$40,000 Cash$60,000 Equipment190,000 Furniture70,000 Bank Loan80,000 Accounts Payable30,000 $150,000 $100,000

On March 1, Razul and Amy added a new partner to the business, Sheila. Sheila will contribute $100,000 and receive a 35% share of the business. Use the capital balances from January 1 to determine any bonuses. Assume the existing partners will split any bonus evenly.

10000035122500

During the year, Razul and Amy withdrew $20,000 and $15,000 respectively and the business reported a net income of $400,000. Their partnership agreement provided for sharing of net income (loss) on the following basis:

1. Salary of $60,000 is allocated to Razul, $50,000 to Amy, and $20,000 to Sheila. 2. Interest is allocated at 7% of each partner's opening capital balance. 3. Remainder is shared where Razul gets 40%, Amy gets 25%, and Sheila gets 35%. 4000006000050000700004025357 2000015000 20000 a) Prepare the journal entries to record the contributions of each partner to start the partnership. 8 marks DateAccount Title and ExplanationDebitCredit b) Prepare a schedule showing the changes in capital and ending capital balances after the admission of Sheila. RazulAmySheilaTotal 12 marks c) Prepare the journal entry to record the admission of the new partner on March 1. DateAccount Title and ExplanationDebitCredit 4 marks

d) To increase revenues, SA Consulting has begun allowing customers to purchase services on account. They have no preference for when customers repay their accounts to encourage customers to buy from SA Consulting rather than its competitors who have strict credit terms.

List 2 deficiencies you can see with how SA Consulting manages its accounts receivable. 2 marks

e) On April 7, 2020, John's Jacks, a client, contacted Razul with a question regarding bad debt. John stated that his customer said they were filing for bankruptcy. Give the journal entry to record the $2000 owed by the customer given that John's Jacks uses the direct method of accounting for bad debts.

DateAccount Title and ExplanationDebitCredit 2 marks

On November 22, 2021, the customer informs John's Jacks that they can pay the bad debt because they had won a law suit against another business. Record the subsequent collection of the amount owed.

DateAccount Title and ExplanationDebitCredit 4 marks Why might the above treatment of the bad debt not be considered acceptable in accordance with ASPE? 2 marks

f) In reviewing the records for a client, Golden Grain Company, Amy noted the following items in the company's capital assets. Golden Grain Company has adopted a partial-year depreciation policy, where depreciation is taken on a monthly basis.

1. On March 31, 2020, Golden Grain spent $16,000,000 to purchase land that already comes with a building, which the company will use as a warehouse. The land has a fair value of $12,000,000 and the building has a fair value of $8,000,000 on the date of the purchase. The building has a residual value of $2,000,000 and is expected to bring future economic benefits to the company evenly over its expected useful life of 20 years. Because land and building were acquired together as a bulk purchase and because the building is attached to the land, the intern recorded the $16,000,000 purchase simply as a debit to building and credit to cash.

2. On July 1, 2020, the company purchased a patent at a cost of $500,000. The patent has a legal life of 20 years even though its useful life is expected to be only 10 years. The intern recorded the purchase as a debit to patent and credit to cash for $500,000.

3. On November 30, 2020, the building incurred some water damage. The company spent $30,000 to repair the damage. The intern capitalized this cost by debiting building and crediting cash for $30,000.

For each of the above events, comment on whether the interns treatment of the event correctly follows ASPE. If the intern was wrong, suggest what she should have done.

6 marks g) On November 15, 2020, a client, Hanson Company, called to ask for advice in recording a journal entry.

On June 1, 2020, Hanson Company borrowed a $500,000 note payable with a term of four years, bearing an annual interest rate of 8%. Of this note, $100,000 plus interest is payable every May 31. Hanson has a November 30 year end, and it prepares adjusting entries and financial statements only once a year.

Prepare the journal entry to record the cash receipt from the arranged note DateAccount Title and ExplanationDebitCredit 2 marks Prepare the required adjusting entry on November 30 DateAccount Title and ExplanationDebitCredit 2 marks Prepare the journal entry to record the payment of the first installment plus interest on May 31 DateAccount Title and ExplanationDebitCredit 4 marks What would be the total note payable balance on May 31, 2021? How much of the loan would be considered current? 2 marks Total note payable = Current portion= h) Prepare the journal entry to record the partner withdrawals of cash at December 31 for SC Consulting.3 marks DateAccount Title and ExplanationDebitCredit e) Prepare a schedule showing the allocation of the net income to the partners of SC Consulting at year end. 15 marks TotalRazulAmySheila Net Income$400,000 $70,500$57,00028575

f) Prepare the journal entries to record the distribution of net income and the closing of the withdrawals accounts. Assume revenues and expenses have been closed to the income summary account.

8 marks DateAccount Title and ExplanationDebitCredit

g) After dividing the income for the year, all parties agreed to liquidate the partnership. The values of the assets and liabilities are shown below. The furniture is sold for $54,000 and all other assets are sold at their given values. Any gains or losses from liquidation are split evenly among all partners.

54,000 Cash$482,000 Accounts Receivable50,000 Net Equipment247,000 Net Furniture84,000 Accounts Payable36,000 Bank Loan112,000

Prepare the journal entries to sell the assets, distribute any gains or losses to the partners, pay the liabilities and distribute the cash to the partners.

16 marks DateAccount Title and ExplanationDebitCredit