In November of 2020, Hayley and Francois Chouinard decided to open a restaurant and wine bar in McCall, Idaho, a resort town about 90 miles north of Boise. The Chouinards had been following the growth in McCall for several years and considered it to be an area with great potential for their business. They were especially encouraged by French developer Jean-Pierre Boes plans to build Tamarack Resort, which will be located approximately 15 miles from McCall. Construction on the $1.5 billion destination ski and golf resort had begun in early 2020. Tamarack plans to target wealthy national and international vacationers, similar to resorts in Whistler, British Columbia and Vail, Colorado.

In addition to a full service restaurant and bar, Hayley and Francois plan to have a small retail area to sell a unique selection of wines, cheeses and other related items. They began their search for a location in March and found what they considered to be an ideal space near the recently renovated Hotel McCall and walking distance to Payette Lake.

Pre-Opening Period

Hayley and Francois invested $600,000 of personal funds and decided to call their new business Lake Street Wine and Dine (hereafter LSWD). On November 15, 2020 they signed a 10-year lease for the location they desired beginning 1/1/21. The lease does not transfer title or contain a bargain purchase option, and is not a specialized asset. The lease covers 10 years of the buildings 40-year useful life, and the present value of the lease payments is less than 90% of the fair value of the building leased. Lease payments are $110,000 per year beginning on 1/1/21. While the Chouinards were allowed to move in and start renovation on December 1, consider the first annual rental payment to start 1/1/21 and to cover the lease period from 1/1/21 12/31/21. The Chouinards incremental borrowing rate is 7% and the lessors implicit rate is not known. [Note that you will need to determine whether this is classified as an operating or finance lease.]

The grand opening was scheduled for January 1^st and the month of December was used to prepare the facility and purchase retail merchandise and restaurant supplies. The prior tenant had been a buffet restaurant, so extensive paint and remodeling was necessary in order to create the atmosphere they desired. The cost (all paid in cash) of remodeling the interior space totaled $200,000 and the cost of furnishings was an additional $150,000, including furnishings for the kitchen, bar, and a point of sale computer system. They expected the useful life of the leasehold improvements, furnishings and equipment to be 10 years. [Note: Leasehold improvements are reported as property, plant and equipment (PP&E) assets on the balance sheet. ASC 842 does not change the way they are handled (i.e. these are NOT included in the ROU asset, but rather, are included in PP&E and depreciated, not amortized.)

In an effort to attract the Tamarack clientele, Hayley and Francois decided to carry a high-end wine selection along with some northwest favorites, which would differ from those offered in the restaurant. They placed their initial retail wineinventory order with a distributor in early November and their first merchandise arrived December 20^th with an invoice for $92,000 payable to the distributor. They also ordered wine that would be served in the restaurant (i.e. food and wine inventory) from the same distributor. These shipments of consumable items arrived on the same day with an invoice for $16,000 payable to the distributor. Lastly, they acquired food and supplies (i.e. food and wine inventory) for the kitchen from local food distributors for cash payments totaling $19,000.

On December 26^th, Hayley and Francois reviewed the last minute preparations for opening day as well as where their bank account stood. Hayley was concerned they had two outstanding invoices to suppliers totaling $108,000 and that their cash balance had dwindled down to $231,000. Francois summarized his concerns. In one month, we have gone through $369,000 and that doesnt count the outstanding invoices we still owe. We wont be in business very long at this rate.

On December 27^th, Hayley and Francois consulted with Ann Stamey, a local certified public accountant, on setting up accounting records for LSWD and advice about obtaining additional funding. For example, should they seek other investors or should they try to get a loan? Ann explained that, while their bank balance was declining, they were not losing money; rather they were investing in assets. Even so, they were right to be concerned with the amount of cash remaining. After Ann explained the options of seeking equity versus debt financing, Hayley and Francois decided to seek a loan as protection against cash shortages.

The First Year of Operations

On 1/1/21, the Chouinards obtained a loan for $600,000 from a local bank, payable at the end of two years with annual interest payments at an annual rate of 7%. Feeling more comfortable about the companys cash position with the new loan closing on 2/1/21, Hayley and Francois proceeded with their plans for the grand opening of LSWD on 1/1/21.

The Grand Opening event was advertised in the local newspaper and via flyers posted at the other area merchants. The total cost of the advertising for the grand opening was $1,500, which was paid in cash. As planned, on January 1^st, the doors opened to the public and, as an opening promotion, they had free wine tasting and live music. They estimated the cost of wine for the free tasting to be $2,200. Note that they used wine from the food/wine inventory for the tasting. Friends in a band volunteered to play at the event so no fee was paid for the live music. Given the amount of foot traffic they had received during the day, the opening day seemed like a success. A summary of other events for the first year of operations follows:

• Payment of $110,000 was made on January 1, 2021 for the annual building lease payment as outlined above.

• Retail sales for the year ending December 31, 2021 totaled $360,000. All sales were for cash.

• Restaurant sales (including food and wine) totaled $245,000 for the first year ending December 31, 2021. All sales were cash sales.

• Between January 1, 2021 and December 31, 2021, LSWD took delivery of retail inventories (i.e., inventories other than food and wine to be served in the restaurant) valued at $160,000. All merchandise was purchased on account. During the year, LSWD made payments to suppliers in the amount of $150,000.

• Between January 1, 2021 and December 31, 2021, LSWD took delivery of restaurant food and wine inventory valued at $98,000. All were paid in cash.

• A one-year insurance policy to cover miscellaneous liabilities was purchased on September 1, 2021 for $12,000.

• The company purchased Investments in debt securities classified as available-for-sale on September 30, 2021 for $20,000.

• Wages for part-time employees during the year ended December 31, 2020 totaled $80,000. Of that amount, $6,000 was unpaid at December 31, 2021.

• Miscellaneous expenses (including Ann Stameys consulting fee) totaling $38,000 were paid in cash.

• Interest on the note payable for the first year was paid December 31, 2021.

Other information:

• Inventories on hand at December 31, 2021 for retail merchandise were valued at $117,000 and inventories for restaurant food and wine were valued at $46,000. [Remember the formula to calculate COGS: BI + Purchases - COGS = EI]. Calculate a separate COGS for retail inventory and for food and wine inventory.

• The Investments in debt securities classified as available-for-sale had a fair market value of 19,000 at December 31, 2021. Remember that the FMV Valuation Adjustment account is either an adjunct (if DR balance) or a contra account (if CR balance). The account to which it relates should be reported on the Balance Sheet by either adding the adjunct amount or subtracting the contra amount. [Hint: refer back to Ch. 17 to how we account for FMV changes for AFS securities].

• The tax rate in 2021 is 21% and no new rate has been enacted for future years. Excess of tax depreciation over book depreciation is $35,000. [Hint: refer back to Ch. 19 to how we account for deferred taxes.]

• Hint: Check figure net income should be $57,275.

• Required (use the excel worksheet file to complete):

• Assume the events for the pre-opening period ended December 31, 2021 have been recorded correctly and are reflected in the beginning balances in the T-accounts excel worksheet provided. Record the events for the first year of operations ended December 31, 2021 in the journal entry worksheet provided and then post to the T-accounts provided.
• Remember to record any required adjusting entries required to prepare accrual-based financial statements.
• Prepare the following financial statements (templates are included in the excel worksheet provided; you can also refer to course packet pgs. for a refresher on how items are presented in the Statement of Owners Equity and Statement of CI):
  1. Income statement for the year ended 12/31/21
  2. Statement of Comprehensive income for the year ended 12/31/21
  3. Balance sheet at 12/31/21
  4. Statement of Owners equity at 12/31/21
  5. Statement of Cashflows for the year ended 12/31/21
• Compute the profit margin percent of sales for retail and for food and wine for the year ended 12/31/21. Profit margin is equal to Sales COGS. (Template is included in the excel worksheet provided):

• Note you may use more than or less than the total number of t-accounts provided.