Introduction This practice case has been designed to give introductory-level business students practical experience in the application of accounting concepts. This practice case will provide students with an overview of the complete accounting cycle of a merchandising company located in British Columbia. Initial transactions are analyzed, journalized in the general journal and recorded in the general ledger, adjusting entries are required under the accrual concept of recording accounting information which is in accordance with accounting standards for private enterprises (ASPE) and International accounting standards (IFRS) in Canada. Financial Statements are prepared and some comments on the solvency and profitability of the company are requested. This exercise can be completed with the assistance of a computer software package OR manually using a spreadsheet software program. The Company Mountain Adventures Ltd., located in Prince George, B.C., is a wholesale company selling supplies and materials for climbing, hiking and other outdoor activities mainly to the retail supply stores in British Columbia. Mountain Adventures Ltd. is a Canadian controlled private corporation, incorporated under the laws of British Columbia, and is required to remit GST, Goods and Services Tax, at the rate of 5% on all its sales and must remit taxes collected to the federal government on a quarterly basis. GST amounts charged by its suppliers can be deducted from this remittance. Mountain Adventures Ltd. is required to remit PST, Provincial Sales Tax, at the rate of 7% on all its sales and must remit taxes collected to the provincial government on a monthly basis. Mountain Adventures Ltd. is considering an IPO (Initial Public Offering) and listing on the TSX, Toronto Stock Exchange. Management is discussing the potential to expand into global adventure tourism. Therefore, IFRS accounting standards are used. Mountain Adventures Ltd. negotiated with most of its trade suppliers 1% or 2% discount if the company pays its invoice within 10 days, otherwise the net amount is due within 20 to 30 days. GST is charged on the gross amount. Mountain Adventures Ltd. pays its workforce according to the Employment Standards Act of British Columbia. All regulatory source deductions should be accounted for. The WorkSafe BC assessment rate is 1% of gross salaries. Mountain Adventures Ltd. invests excess cash in short term investments, from time to time. Mountain Adventures Ltd. maintains a general journal and general ledger only. The Financial Statements, June 30, 2015 The Chart of Accounts of Mountain Adventures Ltd. as at June 30, 2015 together with the Balance Sheet as at June 30, 2015 showing the Opening Balances as of this date are as follows: 3 Chart of Accounts- Current Year 2015 Sample Sage/Simply Accounting account set up ASSETS Current Assets 1060 Cash 1200 Accounts receivable 1205 Allowance for doubtful accounts Accounts receivable: Net 1300 Prepaid insurance 1301 Prepaid rent 1350 Inventory 1400 Held for trading investments Total Current Assets Property, Plant & Equipment 1820 Store equipment 1825 Accumulated Depreciation- Store equipment Store equipment: Net 1880 Land Total Property, Plant & Equipment LIABILITIES Current Liabilities 2100 Accounts payable 2140 Notes payable 2150 Bank loan 2160 Corporate income taxes payable 2170 Worksafe BC payable 2180 PST payable 2215 EI payable 2220 CPP payable 2225 Income tax payable Total payroll deductions 2380 GST collected on sales 2385 GST paid on purchases GST payable 2400 Interest payable Total Current Liabilities EQUITY Share Capital 3350 Common shares Share capital 3500 Retained earnings 3560 Retained earnings, previous year Total retained earnings REVENUE Revenue 4210 Sales revenue 4220 Sales returns Net Sales Other Revenue 4300 Dividend revenue 4460 Gain on sale assets Total Other Revenue EXPENSE Cost of Goods Sold 5010 Purchases 5020 Purchases returns 5030 Purchase discounts 5040 Cost of goods sold Total Cost of Goods Sold General & Operating Expenses 5620 Bad debts expense 5660 Depreciation expense 5685 Insurance expense 5740 Interest expense 5750 Rent expense 5760 Salaries and benefits expense 5770 Worksafe BC expense 5780 Income tax expense Total Expenses 4 Mountain Adventures Ltd. Statement of Financial Position As at June 30, 2015 ASSETS Current Assets Cash $24,100 Held-for-trading investments 10,000 Accounts receivable $5,000 Less: Allowance for doubtful accounts ( 1,000) 4,000 Inventory 20,000 Total Current Assets $58,100 Property, Plant and Equipment Store equipment $30,000 Less: Accumulated depreciation, equipment (9,000) 21,000 Land 3,000 Total Property, Plant and Equipment $24,000 TOTAL ASSETS $82,100 LIABILITIES & SHAREHOLDERS EQUITY Current Liabilities Accounts payable $ 7,500 PST payable 1,000 GST payable 500* Payroll liabilities 2,380** Total Current Liabilities $11,380 Shareholders Equity Common Shares $10,000 Retained Earnings 60,720 Total Shareholders Equity $70,720 TOTAL LIABILITIES & SHAREHOLDERS EQUITY $82,100 **post this opening balance to #2380 GST collected on sales **comprises #2215 EI payable $135; #2220 CPP payable $370; #2225 Incomes tax payable $1675; #2170 Worksafe BC payable $200 5 The Transactions for July, 2015 July 2 - Sold merchandise to East Robson Inc. at invoice price of $15,500 + GST + PST; on credit; terms, n/20; Invoice No. 1001 July 3 - Received merchandise from Everest Company at invoice cost of $2,000 + GST; credit terms, 1/10, n /20; Purchase Order No. 5001. No PST since the manager provided the provincial vendor number to the supplier. There will be no PST paid on any merchandise purchased. July 4 - Sold merchandise to West Rupert Co. for $4,500 + GST + PST; on credit terms, n/20; Invoice No. 1002 July 5 - Received merchandise from Katmandu Ltd. at an invoice cost of $4,000 + GST on credit; terms, 1/10, n/20; Purchase Order No. 5002 July 6 - Sold merchandise for cash to Tabor Equipment for $7,500 + GST + PST July 7 - Received merchandise from Colton Manufacturing Company at a cost of $1,500 + GST; paid cash July 8 - Purchased a capital asset (store equipment) at a cost of $19,800 + GST + PST; gave a 90-day, 6 percent, interest-bearing note payable for the purchase price; assume date was July 1, 2015 for interest and depreciation calculations July 9 - Sold a tract of land for $9,000 + GST which previously was used by the company as a parking lot and originally cost $3,000; collected cash July 10- Collected the account receivable from West Rupert Co.; Invoice No. 1002 July 11- Paid $1,200 for a one-year insurance policy on property, plant and equipment starting July 1, 2015 July 11- Obtained a $5,000 bank loan; signed a one-year, 7 percent, interest-bearing bank loan agreement. Assume date was July 1, 2015 for interest calculation July 12- Paid the account payable to Katmandu Ltd. within the discount period. Purchase Order No. 5002 July 13- Paid monthly rent, $2,500 + GST July 14- Sold merchandise for cash, $3,500 + GST + PST July 15- Purchased merchandise for cash, $4,500 + GST July 15- Paid June 30th source deductions to the Canada Revenue Agency (CRA), payable to the Receiver General; CPP $370; EI $135; taxes $1675 July 16- Sold merchandise on credit to Purdon Co. for $6,500 + GST + PST; terms, n/20, Invoice No. 1003 July 17- Received merchandise on credit from Mountain Co-Op at an invoice cost of $7,000 + GST; terms n/30; Purchase Order No. 5003 6 July 18- Collected the account receivable from East Robson Inc. Invoice No. 1001 July 19- Paid the account payable to Everest Company after the discount period. Purchase Order No. 5001 July 20- Returned merchandise purchased on account from Logan Ltd. for a credit; amount $4,500 + GST July 21- Received dividend revenue of $1,000 from the held-for-trading investments July 25- Paid June 30th PST payable to the Minister of Finance July 29- Purchased 600 shares of Ocean Electronics Inc. at $25.00 per share July 30- Paid June 30th Worksafe BC payable to Worksafe BC, the assessment department of the Workers Compensation Board July 30- Paid June 30th GST payable to the Receiver General of Canada. July 31- Paid monthly salaries: gross earnings $8,000 less; CPP $396; EI $140; income taxes $1,500. Employer portions of CPP and EI and $80 for Worksafe BC premiums are also recorded. Adjustments Data developed by Mountain Adventures Ltd. as a basis for the adjusting entries at July 31, 2015 were: a) The average loss rate for bad debts is estimated to be 1 percent of net sales. Record for the month of July. b) The store equipment is depreciated on the straight-line basis of an estimated 10-year useful life with no residual value. The equipment purchased in the period can be depreciated for the entire month. Record one month depreciation. c) On July 31, 2015, the periodic inventory count of goods remaining on hand reflected $25,000. Hint: you need to adjust the opening inventory to a new account, Cost of Goods Sold and also transfer purchases to this account. Thus the following adjusting journal entries will have to be prepared: 1) Cost of goods sold xxx Inventory xxx To transfer the beginning balance to Cost of Goods Sold 2) Inventory xxx Cost of goods sold xxx To bring the inventory amount to the value as at July 31, 2015 3) Purchases (Acct.5010), Purchases Returns(Acct.5020) and Purchase Discounts (Acct.5030) also form part of the Cost of Goods Sold amount d) Account for the Interest expense on the Note Payable and the Bank Loan. OK to round to the nearest dollar. Record one month interest expense. 7 e) Uncollectible amounts in accounts receivable total $560, including GST and PST. f) Account for the Insurance expense, if applicable. g) Unrecorded corporate income tax expense was $2,500. h) Fair market value of the held-for-trading investment portfolio is $25,000. Requirements: Take the Mountain Adventures Ltd. Balance Sheet, as at June 30, 2015, and continue recording transactions for the fiscal year end of July 31, 2015 as follows: 1. Analyze each of the July transactions and prepare a journal entry in the General Journal. Explanations are not required. 2. Post the above journal entries to the General Ledger. Create the General Ledger accounts you need and fill in the beginning balances before posting the July transactions. 3. Journalize and post the adjusting journal entries. 4. Prepare the July 31, 2015 (Adjusted) Trial Balance. Note: Simply Accounting will call this the Trial Balance. 5. Prepare the Income Statement for the month of July and the Statement of Financial Position/Balance Sheet as at July 31, 2015. (Amounts may be rounded to the nearest dollar) 6. Briefly comment on the financial health of Mountain Adventures Ltd. Grade Criteria = 20% of 100 marks Journal entries 30 Adjusting journal entries 20 General ledger 10 (Adjusted) Trial Balance 10 Income Statement 10 Balance Sheet/Statement of Financial Position 10 Comments on financial position 10 Total 100