Contributed by Jeffrey Botham and Bruce J McConomy Lazaridis School of Business Economics, Wilfrid Laurier University Pyramid Holdings Limited (PHL) is a private company based in Winnipeg, Manitoba, that offers storage solutions, such as shelving units and organizers, to a variety of business clients Joan Chen has been the bookkeeper for PHL for several years, and prepared a preliminary trial balance for the fiscal year ended March 31, 2020 (Exhibit I) The company chose a March year end to coincide with its business cycle The company's owner, James Steel, has been thinking of taking the company public in three or four years and would like to ensure the financial statements are attractive to potential investors Exh ibit I Financial Statements Pyramid Holdings Preliminary Trial Balance March 31, 2020 Dr Cr Cash $ 160,000 Accounts receivable 180,000 less allowance for doubtful accounts $ 7,200 Inventory 181,000 Inventory in Warehouse 2 50,000 Property, plant, and equipment 240,000 Accumulated depreciationProperty, plant, and equipment 21,000 VehiclesLeased 4,000 Vehicles 120,000 Accumulated depreciationVehicles 25,000 Accounts payable 100,000 Accrued liabilities 55,000 Notes payable 50,000 Common shares 235,000 Retained earnings, April 1, 2019 185,000 Revenue 900,200 Cost of goods sold 290,000 Salaries 200,000 Payroll taxes 20,000 Vehicle expenses 14,200 Rent expense 65,000 Rent expenseWarehouse 2 24,000 Utilities 11,200 Income tax expense 0 Bad debt expense 3,600 Depreciation and amortization 0 Other expenses 15,400 Total $1,578,400 $1,578,400 Prepared by Joan Chen, Bookkeeper When Joan Chen presented Jim with the preliminary trial balance for the 2020 fiscal year, a number of things struck him as being not quite right Joan is not a CPA, so Jim prepared a list of items for follow up with the auditor to make sure they are dealt with correctly (Exhibit II) During a heated discussion with Joan about several of the contentious issues on the list, Joan walked out of the meeting and quit before preparing PHL's final trial balance and financial statements Exhibit II Items for Follow Up with Auditor The following is a list of items for follow up with the auditor compiled by Jim It includes information provided by Joan to you PHL purchased a used delivery truck for $10,000 on July 1, 2019, and it was expensed as part of Vehicle Expenses The lease payments for the company car, used mainly by the VP of sales for visiting clients, are incorrectly recorded under VehiclesLeased The monthly payments are $400 and began on May 1, 2019, for a three year lease (Note only the first 10 months of payments had been made by March 31, 2020 ) If PHL had purchased the car, it would have cost $30,000 The car has an expected useful life of six years The company's heat, electric, water, and related utility bills had not been received when Joan prepared the financial statements, so she accrued a total amount of $1,000 for the three bills in the trial balance When the final invoices arrived, the cost actually totaled $2,500, due to an extremely cold winter and repairs needed to a frozen water pipe In addition, there was $10,000 damage (to carpets and so on) due to the flooding caused by the frozen pipe Joan did not record the $10,000 amount disbursed because it should be covered by the company's insurance policy There is an $800 deductible on the insurance claim that remains outstanding and will be deducted from the reimbursement from the insurance company ATL Bank had loaned the company $20,000 during the first week of the 2019 20 fiscal year, and the company made a payment of $5,000 to the bank on November 1, 2019 Joan admitted she had not recorded the payment, and was going to speak with the auditor about it when they came in for the year end audit The bank charges 6 interest on the loan, but Joan did not record any interest because she did not consider it material ATL charges its usual prime plus 1 (i e , 6 ) on the loan, with the interest due on the anniversary date each year The $20,000 amount is included on the trial balance in Accounts Payable The audit fee was estimated at $25,000 However, the audit firm has indicated that it will charge an additional $20,000 to help make an initial consulting report regarding factors to consider when Jim eventually takes the company public The audit firm estimates that the consulting report and related work was 90 complete on March 31, 2020 Neither of these items has been recorded in the trial balance A shipment of inventory valued at $1,500 was shipped by a supplier on March 28, 2020, scheduled to arrive at PHL on March 30, 2020, but it arrived on April 3, 2020 It was delayed because it was shipped by truck and got caught in a snowstorm The shipment was FOB shipping point Joan records shipments based on the arrival date at the company's warehouse and therefore no entry had been made to include the inventory Of course it was also not included in the physical count that took place on March 31, 2020, as it was not present for warehouse personnel to count The company has not performed a detailed analysis of its allowance for doubtful accounts since the auditors were in last year it was $5,600 at March 31, 2019 (before any accounts receivable were written off during the 2019 20 fiscal year) Joan booked a preliminary estimate of $3,600 of bad debts for fiscal 2019 20, because she did not know how the amount recorded in 2018 19 was calculated Joan knows that the auditors like to see an aged accounts receivable schedule on the first day of their audit, so she has prepared one (Exhibit III) Joan took a week off between March 24 and March 31, and the invoices for new office furniture purchases that came in during that period totaled $15,000 and were recorded in inventory by her assistant The office furniture had arrived at PHL on March 1, 2020, and is expected to last 10 years Joan and her assistant attended the inventory count at the main warehouse Similar to March 31, 2019, the owner assured her that there was $50,000 of good inventory at Warehouse 2, a warehouse in Brandon, Manitoba, that is rented from the owner (Jim's father) at a cost of $2,000 per month Joan never verified the existence of the inventory, nor had she (or the auditors) even been to the warehouse The cost of the goods purchased was paid for by the note payable that appears on the trial balance The note is noninterest bearing, so Jim says he is in no hurry to pay it The $50,000 of inventory was originally purchased on December 31, 2017, according to Jim PHL uses straight line depreciation for all of its property, plant, and equipment other than vehicles (where double declining balance depreciation is used) Aside from the items discussed above, there were no additions or disposals during the year Property, plant, and equipment items are estimated to last for 10 years, and vehicles for five years Joan had not recorded any depreciation expense for the 2019 20 year before she quit However, depreciation charges prior to 2019 20 have been audited and were done correctly Jim had arranged a special deal with one of his best customers (BCL) on October 1, 2019 The deal allowed the customer to purchase $22,000 (cost) of inventory for a price of $35,000 The special part of the deal was that BCL would not have to make any payments on the $35,000 outstanding amount for the goods until October 1, 2023 In addition, BCL would only be charged 2 interest on the amount outstanding to be paid each year on October 1 BCL was quite pleased with this deal because it has a bit of a cash flow problem, so BCL's bank charges it prime plus 3 (8 annually) instead of the 6 charged to PHL Joan recorded the sale of $35,000 and the cost of goods sold of $22,000 in October 2019, but was unsure if other entries were needed PHL pays tax at a 25 tax rate, and Joan had told Jim that based on her discussions with the auditors, once again there are no permanent differences, so under ASPE taxes are pretty simple to calculate Joan left before estimating the tax expense for fiscal 2019 20 However, she sent a cheque to the Canada Revenue Agency for $20,000 on March 15, 2020, because that was the tax expense from fiscal 2018 19 and so it was her best guess as to how much PHL will owe in taxes for fiscal 2019 20 However, she did not record the $20,000 payment before she left When Joan provided Jim with the preliminary trial balance (Exhibit I), she included a few questions for the auditors at the bottom of the trial balance You hope to be able to impress Jim by also dealing with these questionsbefore the auditors arrive Exhibit III Aged Accounts Receivable Pyramid Holdings Aged Accounts Receivable March 31, 2020 Vendor 30 days 31 60 days 61 90 days 90 days Total Abacus International $ 500 $ 500 $ 500 $ 500 $ 2,000 Beta Limited 1,000 750 250 2,000 BCL Limited 35,000 35,000 Charlie and Partners 15,000 15,000 30,000 Delta Inc 20,000 24,000 44,000 Echo Limited 1,313 1,313 2,626 Foxtrot Corp 2,424 2,424 2,424 7,272 Golf Unlimited 10,000 10,000 Aviation Partners 45,000 45,000 Acme Industries 2,102 2,102 Total $18,924 $38,674 $73,487 $48,915 $180,000 You are the replacement bookkeeper assigned by the ABC temp agency to help PHL prepare financial information for the auditor You are currently completing your business degree in the evenings, and hope to write CPA examinations in a year or two The auditor will be arriving in a week Jim offered to hire you as a full time replacement, once your two week assignment as a temporary bookkeeper is up, as long as you can make the numbers look good for him and the company He indicated that he expects that when the company goes public, he will be able to pay you a $6,000 bonus if you can get the job done right By coincidence, $6,000 is the exact amount you owe for your student loan, so it would come in quite handy You were able to call Joan, who provided you with some additional information (also inExhibit II) before she left on a six month trip to parts unknown where clearly, she does not want to be contacted again

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Contributed by Jeffrey Botham and Bruce J. McConomy Lazaridis School of Business & Economics, Wilfrid Laurier University Pyramid Holdings Limited (PHL) is a private company

Contributed by

Jeffrey Botham and Bruce J. McConomy

Lazaridis School of Business & Economics, Wilfrid Laurier University

Pyramid Holdings Limited (PHL) is a private company based in Winnipeg, Manitoba, that offers storage solutions, such as shelving units and organizers, to a variety of business clients. Joan Chen has been the bookkeeper for PHL for several years, and prepared a preliminary trial balance for the fiscal year ended March 31, 2020 (Exhibit I). The company chose a March year end to coincide with its business cycle. The company's owner, James Steel, has been thinking of taking the company public in three or four years and would like to ensure the financial statements are attractive to potential investors. Exhibit I

Financial Statements

Pyramid Holdings

Preliminary Trial Balance

March 31, 2020

Dr.

Cr.

Cash

$ 160,000

Accounts receivable

180,000

less allowance for doubtful accounts

$ 7,200

Inventory

181,000

Inventory in Warehouse #2

50,000

Property, plant, and equipment

240,000

Accumulated depreciationProperty, plant, and equipment

21,000

VehiclesLeased

4,000

Vehicles

120,000

Accumulated depreciationVehicles

25,000

Accounts payable

100,000

Accrued liabilities

55,000

Notes payable

50,000

Common shares

235,000

Retained earnings, April 1, 2019

185,000

Revenue

900,200

Cost of goods sold

290,000

Salaries

200,000

Payroll taxes

20,000

Vehicle expenses

14,200

Rent expense

65,000

Rent expenseWarehouse #2

24,000

Utilities

11,200

Income tax expense

Bad debt expense

3,600

Depreciation and amortization

Other expenses

15,400

Total

$1,578,400

Prepared by Joan Chen, Bookkeeper

When Joan Chen presented Jim with the preliminary trial balance for the 2020 fiscal year, a number of things struck him as being not quite right. Joan is not a CPA, so Jim prepared a list of items for follow-up with the auditor to make sure they are dealt with correctly (Exhibit II). During a heated discussion with Joan about several of the contentious issues on the list, Joan walked out of the meeting and quit before preparing PHL's final trial balance and financial statements.

Exhibit II

Items for Follow-Up with Auditor

The following is a list of items for follow-up with the auditor compiled by Jim. It includes information provided by Joan to you.

PHL purchased a used delivery truck for $10,000 on July 1, 2019, and it was expensed as part of Vehicle Expenses.
The lease payments for the company car, used mainly by the VP of sales for visiting clients, are incorrectly recorded under VehiclesLeased. The monthly payments are $400 and began on May 1, 2019, for a three-year lease. (Note: only the first 10 months of payments had been made by March 31, 2020.) If PHL had purchased the car, it would have cost $30,000. The car has an expected useful life of six years.
The company's heat, electric, water, and related utility bills had not been received when Joan prepared the financial statements, so she accrued a total amount of $1,000 for the three bills in the trial balance. When the final invoices arrived, the cost actually totaled $2,500, due to an extremely cold winter and repairs needed to a frozen water pipe. In addition, there was $10,000 damage (to carpets and so on) due to the flooding caused by the frozen pipe. Joan did not record the $10,000 amount disbursed because it should be covered by the company's insurance policy. There is an $800 deductible on the insurance claim that remains outstanding and will be deducted from the reimbursement from the insurance company.
ATL Bank had loaned the company $20,000 during the first week of the 2019-20 fiscal year, and the company made a payment of $5,000 to the bank on November 1, 2019. Joan admitted she had not recorded the payment, and was going to speak with the auditor about it when they came in for the year-end audit. The bank charges 6% interest on the loan, but Joan did not record any interest because she did not consider it material. ATL charges its usual prime plus 1% (i.e., 6%) on the loan, with the interest due on the anniversary date each year. The $20,000 amount is included on the trial balance in Accounts Payable.
The audit fee was estimated at $25,000. However, the audit firm has indicated that it will charge an additional $20,000 to help make an initial consulting report regarding factors to consider when Jim eventually takes the company public. The audit firm estimates that the consulting report and related work was "90% complete" on March 31, 2020. Neither of these items has been recorded in the trial balance.
A shipment of inventory valued at $1,500 was shipped by a supplier on March 28, 2020, scheduled to arrive at PHL on March 30, 2020, but it arrived on April 3, 2020. It was delayed because it was shipped by truck and got caught in a snowstorm. The shipment was FOB shipping point. Joan records shipments based on the arrival date at the company's warehouse and therefore no entry had been made to include the inventory. Of course it was also not included in the physical count that took place on March 31, 2020, as it was not present for warehouse personnel to count.
The company has not performed a detailed analysis of its allowance for doubtful accounts since the auditors were in last year; it was $5,600 at March 31, 2019 (before any accounts receivable were written off during the 2019-20 fiscal year). Joan booked a preliminary estimate of $3,600 of bad debts for fiscal 2019-20, because she did not know how the amount recorded in 2018-19 was calculated. Joan knows that the auditors like to see an aged accounts receivable schedule on the first day of their audit, so she has prepared one (Exhibit III).
Joan took a week off between March 24 and March 31, and the invoices for new office furniture purchases that came in during that period totaled $15,000 and were recorded in inventory by her assistant. The office furniture had arrived at PHL on March 1, 2020, and is expected to last 10 years.
Joan and her assistant attended the inventory count at the main warehouse. Similar to March 31, 2019, the owner assured her that there was "$50,000 of good inventory" at Warehouse #2, a warehouse in Brandon, Manitoba, that is rented from the owner (Jim's father) at a cost of $2,000 per month. Joan never verified the existence of the inventory, nor had she (or the auditors) even been to the warehouse. The cost of the goods purchased was "paid for" by the note payable that appears on the trial balance. The note is noninterest-bearing, so Jim says he is in no hurry to pay it. The $50,000 of inventory was originally purchased on December 31, 2017, according to Jim.
PHL uses straight-line depreciation for all of its property, plant, and equipment other than vehicles (where double declining-balance depreciation is used). Aside from the items discussed above, there were no additions or disposals during the year. Property, plant, and equipment items are estimated to last for 10 years, and vehicles for five years. Joan had not recorded any depreciation expense for the 2019-20 year before she quit. However, depreciation charges prior to 2019-20 have been audited and were done correctly.
Jim had arranged a special deal with one of his best customers (BCL) on October 1, 2019. The deal allowed the customer to purchase $22,000 (cost) of inventory for a price of $35,000. The "special" part of the deal was that BCL would not have to make any payments on the $35,000 outstanding amount for the goods until October 1, 2023. In addition, BCL would only be charged 2% interest on the amount outstanding to be paid each year on October 1. BCL was quite pleased with this deal because it has a bit of a cash flow problem, so BCL's bank charges it prime plus 3% (8% annually) instead of the 6% charged to PHL. Joan recorded the sale of $35,000 and the cost of goods sold of $22,000 in October 2019, but was unsure if other entries were needed.
PHL pays tax at a 25% tax rate, and Joan had told Jim that based on her discussions with the auditors, "once again there are no permanent differences, so under ASPE taxes are pretty simple to calculate." Joan left before estimating the tax expense for fiscal 2019-20. However, she sent a cheque to the Canada Revenue Agency for $20,000 on March 15, 2020, because that was the tax expense from fiscal 2018-19 and so it was her best guess as to how much PHL will owe in taxes for fiscal 2019-20. However, she did not record the $20,000 payment before she left.
When Joan provided Jim with the preliminary trial balance (Exhibit I), she included a few questions for the auditors at the bottom of the trial balance. You hope to be able to impress Jim by also dealing with these questionsbefore the auditors arrive!

Exhibit III

Aged Accounts Receivable

Pyramid Holdings

Aged Accounts Receivable

March 31, 2020

Vendor

<30 days

31-60 days

61-90 days

>90 days

Total

Abacus International

$ 500

$ 2,000

Beta Limited

1,000

750

250

2,000

BCL Limited

35,000

Charlie and Partners

15,000

30,000

Delta Inc.

20,000

24,000

44,000

Echo Limited

1,313

2,626

Foxtrot Corp.

2,424

7,272

Golf Unlimited

10,000

Aviation Partners

45,000

Acme Industries

2,102

Total

$18,924

$38,674

$73,487

$48,915

$180,000

You are the replacement bookkeeper assigned by the ABC temp agency to help PHL prepare financial information for the auditor. You are currently completing your business degree in the evenings, and hope to write CPA examinations in a year or two. The auditor will be arriving in a week. Jim offered to hire you as a full-time replacement, once your two-week assignment as a temporary bookkeeper is up, as long as you can "make the numbers look good" for him and the company. He indicated that he expects that when the company goes public, he will be able to pay you a $6,000 bonus "if you can get the job done right." By coincidence, $6,000 is the exact amount you owe for your student loan, so it would come in quite handy!

You were able to call Joan, who provided you with some additional information (also inExhibit II) before she left on a six-month trip to "parts unknown" where clearly, she does not want to be contacted again.