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