Happy Releaf Ltd Exhibit D: Memo Format Date: To: From: Re: Brief introductory paragraph to Penelope. Revenue Recognition: Current Approach Revenue Recognition: Suggested Alternative Approach Impact of Change on Current Ratio Brief closing paragraph ta Penelope. Happy ReLeaf Ltd 2018 was a lucky year for Penelope Wildflower! She was one of the first Canadians awarded a license for a cannabis retail outlet in Ontario. Penelope has always been an avid supporter of alternative medicine. In recent years, she has kept current on the increasingly published health benefits of cannabis use. With the opioid addiction and overdose crisis in many parts of the country, she welcomed the legalization of cannabis on October 17, 2018 along with the financial opportunity to run her own business in a field she was passionate about! Penelope incorporated Happy ReLeaf Ltd ("HRL") in 2018 to operate her cannabis retail outlet. HRL completed its first fiscal year on October 31, 2019. As a Canadian-controlled, private corporation, HRL follows ASPE. Consistent with many other cannabis companies, HRL's first year results did not meet Penelope's expectations. Given the business challenges requiring her time and attention, Penelope hired her nephew, William Weederful, to act as HRL's controller. He has a diploma in project management and is going back to school in the fall to obtain a business degree. "What a fortuitous opportunity!" Penelope thought. "William will gain great practical experience while helping me during this busy time," she mused. Based on the first three months ended January 31, the outlook for 2020 looks promising! With the legalization of cannabis alternatives on October 17, 2019, HRL is seeing new customers and fresh sales! In addition to the regular dried cannabis flower, HRL is now offering edibles, beverages, capsules, and lotions. The new influx of business has left William scrambling to catchup on the accounting for the first quarter of 2020. Penelope has hired your CPA firm to help William complete the monthly accounting for January 2020, draft HRL'S financial statements for the quarter ended January 31, 2020 and provide some additional advice. Your partner has assigned you, Accounting student, to HRL's account. The volatility in 2019 scared investors away. HRL turned bank financing to deal with the lack of stable cash flow and profitability in such a new industry. Going forward, Penelope wants to impress HRL's current lenders and potential future investors. She wants her financial statements to depict a growing, profitable business in 2020 compared to 2019. She also asked William to monitor closely HRL's current ratio and any changes that might impact it. Penelope has learned that it is a factor that will determine HRL's access to future financing with her bank. In order to increase business, HRL introduced a new online ordering system effective November 1st, 2019. In addition to walk-in retail sales, HRL can now accept orders online for pickup or delivery. Details regarding online orders are provided in Exhibit A. William has been recording online sales revenue on the date the order is placed. Penelope wants your advice regarding the new online system and William's approach to recording sales. She is not sure about the timing that these sales are recorded as revenue. Specifically, comment on whether William's revenue recognition policy is acceptable, suggest an alternative method, and describe the impact a change to the alternative method would have on HRL's current ratio. 1 Required: 1. Prepare the necessary journal entries (including adjusting journal entries) for January 31, 2020, their quarter end (November January 31). Include appropriate descriptions for each journal entry. William has provided the balance sheet and income statement for year-ended October 31, 2019 (Exhibit B) and a list of the business transactions for the first quarter ended January 31, 2020 (Exhibit C). Happy Releaf Ltd Happy Releaf Ltd Exhibit B: Financial Statements October 31, 2019 Happy Releaf Lid. Statement of Financial Position October 31, 2019 Happy Releaf Ltd Income Statement Yesir Ended Odober 31, 2019 S LIABILITIES $ 150.802 Current liabilities: Trade payables Other current liabilities In-Store Sales ASSETS Current assets: Cash Accounts receivable Prepaid expenses and doposits Inventory Total current assets 709,095 232,831 24,894 32,136 102,209 Sales return (12,074) 202,151 492,012 Total current liabilities 253,010 Net Revenue Cost of Goods Sold 697,021 100.0% 413.714 59.4% Non-current liabilities: 283,303 10.6% Notes Payable 29,989 Non-current assets Property, plant and equipment Accumulated Depreciation Total non-current assets 39,298 (5,609) 7.2% 33,689 Total non-current liabilities 29,989 5.8% Gross Margin Depreciation Management Foo General and administrative Marketing Salaries Equipment rental Legal foes 1.4% 5,609 50,215 40,445 DO 9,940 20670 33,573 6,446 8,809 2,781 SHAREHOLDERS' EQUITY 4.9% 160,000 0.9% Share capital Retained Earning Total shareholders' equity 82,701 242,701 Supply Total Expenses OPERATING INCOME 27.6% 157,818 125,490 12.05 Total assets 525,701 Total liabilities and shareholders' equity 525.701 Other income 1,743 0.3% NET OPERATING INCOME 127,233 12.3% Income Tax 35% 6.4% 44,531 82,701 NET INCOME 12.9% 4 5 Happy ReLeaf Ltd Happy Releaf Ltd Exhibit C: Additional Information 11. Depreciation expense on HRL's existing property and equipment is $2,000 for Q1. The following list is a summary of activities for HRL's Quarter Ended January 31, 2020: 1. in-store sales for the quarter ending January 31, 2020 ("C1") total $195,576. Customers who require products for medicinal purposes are pre-approved and can buy on account. During 01, 2% of the total in-store sales are on account. 12. William, the controller, provided his spreadsheet summarizing all cash payments made in 01: Management fees $ 13,850 General and administrative $11,155 Salaries $ 9,260 Equipment rental $ 1,778 Supplies $ 1,200 2. Online sales for Q1 were an additional $29,336. All online sales were paid in full online and received the 3% discount. 13. The current portion of HRL's Note Payable is $7,700. 3. The cost of goods sold is for all sales is 55% of the selling price. 4. Sales returns for Q1 amounted to $3,320 and were on cash sales only 14. Online sales totaling $12,000 still require age verification. The company records these online orders as sales for the quarter. These sales are already included in the sales described in point #2 above. 5. The company purchased Inventory in Q1 for $135,000. HRL paid $100,000 cash and the remainder on account. 15. HRL has an income tax rate of 35%. The company will make its first quarterly payment at the end of February 2020 based on their Q1 income before income tax. 6. HRL conducted a physical inventory count on January 31, 2020. There was $215,759 of Inventory on hand on that date. 7. An online marketing campaign for Q1 has ended. The company paid for this campaign in September, 2019 and the $4,000 related to this campaign is part of the prepaid expense balance the October 31, 2019 statement of financial position. 8. HRL received a bill on January 22, 2020, for $3,500 in legal services performed in 01. They will pay the bill in February, 2020. 9. On January 1, 2020, the company borrowed $20,000 cash from the bank at 5% for a 5-year term. Interest is paid on the first day of each month beginning February 1 and the principal is due at the end of the 5-year term. HRL will use these funds to improve the retail store's appearance. 10. The company used the loan obtained in Itern 9 to purchase a new refrigerator for the new edible inventory products. The refrigerator cost $15,000 and was delivered to HRL'S location on January 1, 2020 and immediately placed into use. The refrigerator is estimated to last 3 years and has no residual value. The company uses the straight-line method to depreciation their equipment 7 Happy Releaf Ltd Exhibit D: Memo Format Date: To: From: Re: Brief introductory paragraph to Penelope. Revenue Recognition: Current Approach Revenue Recognition: Suggested Alternative Approach Impact of Change on Current Ratio Brief closing paragraph ta Penelope. Happy ReLeaf Ltd 2018 was a lucky year for Penelope Wildflower! She was one of the first Canadians awarded a license for a cannabis retail outlet in Ontario. Penelope has always been an avid supporter of alternative medicine. In recent years, she has kept current on the increasingly published health benefits of cannabis use. With the opioid addiction and overdose crisis in many parts of the country, she welcomed the legalization of cannabis on October 17, 2018 along with the financial opportunity to run her own business in a field she was passionate about! Penelope incorporated Happy ReLeaf Ltd ("HRL") in 2018 to operate her cannabis retail outlet. HRL completed its first fiscal year on October 31, 2019. As a Canadian-controlled, private corporation, HRL follows ASPE. Consistent with many other cannabis companies, HRL's first year results did not meet Penelope's expectations. Given the business challenges requiring her time and attention, Penelope hired her nephew, William Weederful, to act as HRL's controller. He has a diploma in project management and is going back to school in the fall to obtain a business degree. "What a fortuitous opportunity!" Penelope thought. "William will gain great practical experience while helping me during this busy time," she mused. Based on the first three months ended January 31, the outlook for 2020 looks promising! With the legalization of cannabis alternatives on October 17, 2019, HRL is seeing new customers and fresh sales! In addition to the regular dried cannabis flower, HRL is now offering edibles, beverages, capsules, and lotions. The new influx of business has left William scrambling to catchup on the accounting for the first quarter of 2020. Penelope has hired your CPA firm to help William complete the monthly accounting for January 2020, draft HRL'S financial statements for the quarter ended January 31, 2020 and provide some additional advice. Your partner has assigned you, Accounting student, to HRL's account. The volatility in 2019 scared investors away. HRL turned bank financing to deal with the lack of stable cash flow and profitability in such a new industry. Going forward, Penelope wants to impress HRL's current lenders and potential future investors. She wants her financial statements to depict a growing, profitable business in 2020 compared to 2019. She also asked William to monitor closely HRL's current ratio and any changes that might impact it. Penelope has learned that it is a factor that will determine HRL's access to future financing with her bank. In order to increase business, HRL introduced a new online ordering system effective November 1st, 2019. In addition to walk-in retail sales, HRL can now accept orders online for pickup or delivery. Details regarding online orders are provided in Exhibit A. William has been recording online sales revenue on the date the order is placed. Penelope wants your advice regarding the new online system and William's approach to recording sales. She is not sure about the timing that these sales are recorded as revenue. Specifically, comment on whether William's revenue recognition policy is acceptable, suggest an alternative method, and describe the impact a change to the alternative method would have on HRL's current ratio. 1 Required: 1. Prepare the necessary journal entries (including adjusting journal entries) for January 31, 2020, their quarter end (November January 31). Include appropriate descriptions for each journal entry. William has provided the balance sheet and income statement for year-ended October 31, 2019 (Exhibit B) and a list of the business transactions for the first quarter ended January 31, 2020 (Exhibit C). Happy Releaf Ltd Happy Releaf Ltd Exhibit B: Financial Statements October 31, 2019 Happy Releaf Lid. Statement of Financial Position October 31, 2019 Happy Releaf Ltd Income Statement Yesir Ended Odober 31, 2019 S LIABILITIES $ 150.802 Current liabilities: Trade payables Other current liabilities In-Store Sales ASSETS Current assets: Cash Accounts receivable Prepaid expenses and doposits Inventory Total current assets 709,095 232,831 24,894 32,136 102,209 Sales return (12,074) 202,151 492,012 Total current liabilities 253,010 Net Revenue Cost of Goods Sold 697,021 100.0% 413.714 59.4% Non-current liabilities: 283,303 10.6% Notes Payable 29,989 Non-current assets Property, plant and equipment Accumulated Depreciation Total non-current assets 39,298 (5,609) 7.2% 33,689 Total non-current liabilities 29,989 5.8% Gross Margin Depreciation Management Foo General and administrative Marketing Salaries Equipment rental Legal foes 1.4% 5,609 50,215 40,445 DO 9,940 20670 33,573 6,446 8,809 2,781 SHAREHOLDERS' EQUITY 4.9% 160,000 0.9% Share capital Retained Earning Total shareholders' equity 82,701 242,701 Supply Total Expenses OPERATING INCOME 27.6% 157,818 125,490 12.05 Total assets 525,701 Total liabilities and shareholders' equity 525.701 Other income 1,743 0.3% NET OPERATING INCOME 127,233 12.3% Income Tax 35% 6.4% 44,531 82,701 NET INCOME 12.9% 4 5 Happy ReLeaf Ltd Happy Releaf Ltd Exhibit C: Additional Information 11. Depreciation expense on HRL's existing property and equipment is $2,000 for Q1. The following list is a summary of activities for HRL's Quarter Ended January 31, 2020: 1. in-store sales for the quarter ending January 31, 2020 ("C1") total $195,576. Customers who require products for medicinal purposes are pre-approved and can buy on account. During 01, 2% of the total in-store sales are on account. 12. William, the controller, provided his spreadsheet summarizing all cash payments made in 01: Management fees $ 13,850 General and administrative $11,155 Salaries $ 9,260 Equipment rental $ 1,778 Supplies $ 1,200 2. Online sales for Q1 were an additional $29,336. All online sales were paid in full online and received the 3% discount. 13. The current portion of HRL's Note Payable is $7,700. 3. The cost of goods sold is for all sales is 55% of the selling price. 4. Sales returns for Q1 amounted to $3,320 and were on cash sales only 14. Online sales totaling $12,000 still require age verification. The company records these online orders as sales for the quarter. These sales are already included in the sales described in point #2 above. 5. The company purchased Inventory in Q1 for $135,000. HRL paid $100,000 cash and the remainder on account. 15. HRL has an income tax rate of 35%. The company will make its first quarterly payment at the end of February 2020 based on their Q1 income before income tax. 6. HRL conducted a physical inventory count on January 31, 2020. There was $215,759 of Inventory on hand on that date. 7. An online marketing campaign for Q1 has ended. The company paid for this campaign in September, 2019 and the $4,000 related to this campaign is part of the prepaid expense balance the October 31, 2019 statement of financial position. 8. HRL received a bill on January 22, 2020, for $3,500 in legal services performed in 01. They will pay the bill in February, 2020. 9. On January 1, 2020, the company borrowed $20,000 cash from the bank at 5% for a 5-year term. Interest is paid on the first day of each month beginning February 1 and the principal is due at the end of the 5-year term. HRL will use these funds to improve the retail store's appearance. 10. The company used the loan obtained in Itern 9 to purchase a new refrigerator for the new edible inventory products. The refrigerator cost $15,000 and was delivered to HRL'S location on January 1, 2020 and immediately placed into use. The refrigerator is estimated to last 3 years and has no residual value. The company uses the straight-line method to depreciation their equipment 7