Olivias Music Studio (OMS) Olivia Lewis, a passionate pianist and teacher, has over 20 years of teaching experience. She started Olivias Music Studio (OMS) on January 1, 2021. OMS, located in Toronto, ON, offers piano and music theory lessons and sells instrument accessories such as metronomes, adjustable benches, music stand lamps, and cleaning kits and tools. After what Olivia feels was a successful first year, she is eager to see how the company has performed. The companys year-end is December 31. She has asked you to create a set of financial statements, excluding the statement of cash flows, as she feels she has a good understanding of her cash spending as compared to her budget. Olivia will use these statements for her own use to assist with planning for the future of the company. Exhibit 1 includes an unadjusted trial balance at December 31, 2021. Exhibit 2 includes information on 2021 transactions which require analysis and recording using Accounting Standards for Private Enterprises (ASPE).

Required: 1. Prepare the journal entries for 2021, including any required year-end adjusting entries. Provide an explanation of why each entry is required and how it was calculated. The company prepares annual adjusting entries. 2. Prepare the classified Statement of Earnings, Statement of Retained Earnings, and Statement of Financial Position, for the period ended and as at December 31, 2021. 3. Prepare a professional memo to Olivia Lewis outlining 2 internal control weaknesses. Include an explanation of what can go wrong as a result of each weakness, and recommended changes. Use the format provided below. Required Memo Format TO: FROM: DATE: RE: Internal Control weakness 1 Description of weakness Explanation of what can go wrong as a result of the weakness Recommended change Internal Control weakness 2 Description of weakness Explanation of what can go wrong as a result of the weakness Recommended change

What are control weaknesses? Control weaknesses may relate to the control of cash or any other assets that a company has. Companies should have internal controls in place to protect their assets. Controls may also relate to processes and procedures of a company. When internal controls are missing or weak, a company is said to have an internal control weakness. Example of internal control weakness for a toy manufacturer: Description of weakness: The back door to the companys warehouse where inventory is stored is kept open and unlocked throughout the day, every day. Explanation of what can go wrong as a result of the weakness: Outsiders/unauthorized people can get into the warehouse and steal inventory Recommended change: Ensure the back door is kept locked at all times and provide entry only to authorized people such as employees and delivery personnel. Example internal control weakness for a farming business: Description of weakness: Farm employees are allowed one free bucket of strawberries per week during strawberry season. Employees can pick strawberries from the field and fill a bucket themselves. Explanation of what can go wrong as a result of the weakness: Farm employees may take more strawberries than only one bucket a week which will result in the farm giving away more free strawberries than it intended and this will reduce profit for the business. Recommended change: Implement a system that farm employees must sign off a master list when they have taken their one free bucket of strawberries a week. A manager should monitor the list as well as watch for employees who appear to be taking a bucket of strawberries when they have already signed off on the master list and should be reprimanded if found doing so. You may be able to think of alternate implications and recommendations for the internal control weaknesses above; thats fine as there is not only one right answer. There are several control weaknesses in the OMS case. Find any 2 and use the same format as above to explain each one separately.

Exhibit 1 Olivias Music Studio (OMS) Unadjusted Trial Balance, December 31, 2021 Account name Debit CAD$ Credit CAD$ Cash 4,200 Accounts Receivable 2,500 Supplies 2,600 Inventory - Benches 4,000 Inventory - Metronomes 2,000 Inventory - Lamps 500 Inventory - Cleaning Kits 2,275 Prepaid Insurance 2,700 Storefront Sign 3,000 Furniture & Fixtures 10,000 Computer Equipment 3,000 Accounts Payable 3,500 Contributed Capital 1,000 Retained Earnings (January 1, 2021) - Service Revenue 74,250 Sales Revenue 31,805 Cost of Sales 17,980 Rent Expense 14,400 Salaries Expense 38,400 Marketing Expense 3,000 Total $110,555 $110,555

Exhibit 2 Additional information 1. OMS uses a perpetual inventory system. Below is a breakdown of inventory on hand at December 31, 2021: Quantity Unit Cost Total Cost Net Realizable Value Inventory - Benches 20 $200 $4,000 $3,800 Inventory - Metronomes 40 $50 $2,000 $2,250 Inventory - Lamps 25 $20 $500 $550 Inventory - Cleaning kits 65 $35 $2,275 $2,150 2. The company ran out of a popular lamp. They placed an order for 30 of these lamps on account at a cost $20 each on December 28, 2021. Terms of this order were 2/10, n/30 FOB shipping point. They received an email notifying them of shipment on December 31, 2021. Olivia looked forward to replenishing this popular item and adding it to inventory upon receipt. 3. A count of supplies was also done on December 31, 2021 where $1,550 worth of supplies was found on hand. 4. An insurance policy was purchased in March 2021 for the next 12 months starting April 1, 2021. 5. Olivia was ecstatic when the custom storefront sign arrived on April 1, 2021; just in time to be put up before the stores official grand opening! She hopes that the sign will last for the next 15 years. Olivia sure had fun designing and setting up the store! The furniture and fixtures she invested in (all of which was incurred within the first couple days of January) are expected to last for the next 10 years. Olivia wanted to ensure that she could monitor the stores operations and her teaching schedule. As such, she invested in both a laptop and tablet. Everything was purchased on January 1, 2021 when she took advantage of some Boxing Day sales prices. She expects that both the laptop and tablet would be valuable for the next 5 years where she would need to expect to upgrade. Straight-line method is used for all non-current assets

6. Olivia offers online piano and music theory lessons. Lessons are sold individually or in packages. An individual lesson sells for $100. Packages of 5 lessons sell for $450 and packages of 10 for $850. Customers must pay for the full amount before the lessons begin. All sales are done with cash and/or credit card and payment is assumed collectible upon sale. Cash received from the sales is deposited in the companys bank account at the end of each month. Bank reconciliations are prepared on an annual basis. There were 10 lesson packages sold in December 2021, but the lessons will not take place until January 2022 due to the Christmas holidays. These were all 5-lesson packages and the customers paid in full and look forward to learning from Olivia. These lessons have been recognized as service revenue in December 2021, given it was the period in which cash was collected. 7. A customer bought a 5-lesson package in September 2021, and the lessons occurred in both September and October. The customer promised to pay for the package on October 15, however they have yet to pay this amount owing and all methods of contacting them have been exhausted and the amount has been deemed uncollectible. This has Olivia worried that 10% of all her accounts receivable at the end of the year will not be collected. 8. The following information regarding payroll needs to be considered in preparing year-end financial statements (ignore payroll taxes): Employee Pay rate Pay frequency Olivia Lewis Annual $84,000 15th of the month (for work done in the previous month) 9. OMS is subject to income tax and the tax rate is 30%. 10. Olivia hired a payroll clerk, who is a very hard worker and did not take vacation in 2021. Employees do not typically report payroll errors, so Olivia does not need to monitor the payroll clerk closely.