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Module 5.1 Intermediate Financial Reporting 1 Project 1 Chartered Professional Accountants of Canada, CPA Canada, CPA are trademarks and/or certification marks of the Chartered Professional Accountants of Canada. 2016, Chartered Professional Accountants of Canada. All Rights Reserved. Module 5.1 Intermediate Financial Reporting 1 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 o o o o 2/7 Note receivable Allowance for doubtful accounts Construction-in-progress Inventory Bank reconciliation Module 5.1 Intermediate Financial Reporting 1 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: Account Project 1 Unadjusted Trial Balance DR CR Ref Adjustments DR CR Ref Adjusted Trial Balance DR CR Statement of Financial Position DR CR Statement of Comprehensive Income DR CR 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 Cash Accounts receivable Prepaid insurance Inventory Construction-in-progress Billings Note receivable Land Building, vehicle and equipment Accumulated depreciation building, vehicle and equipment Accounts payable Accrued liabilities Current portion of long-term debt Long-term debt Preferred shares (100 shares outstanding) Common shares (200 shares outstanding) Retained earnings Sales revenue Cost of goods sold Advertising Bad debt expense Bank charges Depreciation expense Gain on sale of truck Interest expense Insurance expense Office expenses Professional fees Training and development Wages, salaries and benefits Income tax expense 3/7 Debit 158,560 124,600 5,500 78,540 20,710 Credit 15,000 10,850 190,000 1,095,660 853,850 82,700 56,500 27,200 240,000 50,000 100,000 151,043 1,302,800 763,460 4,800 5,400 300 72,644 3,450 20,900 14,400 34,800 8,030 3,600 236,646 26,243 $2,879,093 $2,879,093 Module 5.1 Intermediate Financial Reporting 1 Project 1 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 salvage 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: 0-30 days outstanding 31-60 days outstanding 61-90 days outstanding Over 90 days outstanding A/R balance $80,680 20,120 13,800 10,000 Percentage estimated to be uncollectible 0% 5% 10% 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: Costs incurred during the year Estimated costs to complete Billings during the year Collections during the year 20X4 $15,220 10,428 15,000 15,000 20X5 $15,480 19,900 19,900 Rob recorded $19,900 for revenue and $15,480 for cost of goods sold for the work done in 20X5. 4/7 Module 5.1 Intermediate Financial Reporting 1 Project 1 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 $150,470 185,000 230,250 172,800 Costs incurred during the year Estimated costs to complete Billings during the year Collections during the year Rob has recorded $230,250 as the contract revenue and $150,470 as cost of goods sold. 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 CR Sales revenue 5,250 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 CR Sales revenue 5/7 4,960 4,960 Module 5.1 Intermediate Financial Reporting 1 Project 1 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, with each total representing separately identifiable items at December 31, 20X5: Millwork Inc. Raw materials inventory As at December 31, 20X5 Cost Wood panels Ash Birch Cherry Maple Oak Pine White melamine Birch plywood Total panels Plastic laminate Hardware Door catches Drawer slides Hinges Knobs and pulls Screws and nails Total hardware Lacquer Other supplies Total raw materials 6/7 Net realizable value $ 2,620 3,480 8,450 4,640 6,800 4,500 8,200 9,670 $48,360 $ 8,700 $ 3,205 2,890 9,540 5,450 7,600 3,450 6,450 7,840 $ 46,425 $ 12,050 $ 1,200 2,300 3,400 2,650 1,230 $10,780 $ 9,650 $ 1,050 $78,540 $ 1,050 1,860 3,480 1,670 840 $ 8,900 $ 9,900 $ 860 $78,135 Module 5.1 Intermediate Financial Reporting 1 Project 1 10. Following is a summary of Millwork's December 31, 20X5, bank statement: Disbursements December 1, balance Deposits Bank loan direct payment Interest expense Cheques cleared Service charges December 31, balance Receipts Balance $161,815 $74,560 $2,265 1,450 79,625 25 153,010 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. 7/7