Question One

Your supervisor has been promoted to manager of financial reporting for Pulp and Circumstance Inc. (PCI). Before her promotion, she completed the statement of financial position and income statement that follow:

Pulp and Circumstance Inc.

Statement of Financial Position

February 29

	2020	2019
Cash	$3,540,000	$1,260,000
Accounts receivable	1,860,000	2,040,000
Inventory	1,200,000	1,020,000
Property, plant and equipment	3,000,000	4,680,000
Accumulated depreciation	(1,200,000)	(1,440,000)
	$8,400,000	$7,560,000
Accounts payable	$900,000	$1,440,000
Income tax payable	780,000	420,000
Mortgage payable	540,000	1,980,000
Common shares	2,340,000	1,470,000
Retained earnings	3,840,000	2,250,000
	$8,400,000	$7,560,000

Pulp and Circumstance Inc.

Income Statement

Year Ended February 29, 2020

Sales		$22,800,000
Cost of goods sold	17,400,000
Operating expenses	2,160,000
Interest expense	210,000	19,770,000
Income before income taxes		3,030,000
Income tax expense		630,000
Net income		$2,400,000

She also gathered the following information related to the year ended February 29, 2020:

• Equipment with a cost of $1,680,000, accumulated depreciation of $1,005,000 and a carrying amount of $675,000 was sold for $675,000 cash.
• Accounts payable relate exclusively to amounts owed to the suppliers of PCIs inventory.
• All sales and purchases are made on account.
• Depreciation expense is included in operating expenses. All operating expenses other than depreciation were paid for in cash.
• PCI declared and paid dividends totaling $810,000.

You, PCIs most experienced accounting clerk, have also been promoted and asked to prepare the COMPLETE statement of cash flows (in good form) with the operating activities section prepared using the DIRECT method. Since your supervisor will need to review your work, you have been instructed to provide detailed supporting calculations and round all amounts to the nearest dollar (12 marks).

(Please insert response here.)

Your supervisor has also asked that you IDENTIFY in what phase (introductory, growth, maturity or decline) of its lifecycle PCI is AND BRIEFLY JUSTIFY your determination based on the statement of cash flows (2 marks).

(Please insert response here.)

While your supervisor reviews the statement of cash flows, you have time to work on a project for PCIs owner. PCI operates a store in Regina with plans to open a second store in Saskatoon. PCI will need to come up with $450,000 to cover the cost of leasehold improvements to be made to the rented location.

One option being considered is a bank loan. On June 1, 2020, the bank will loan PCI $450,000 at an interest rate of 6% per year or 0.5% per month. PCI will be required to make BLENDED PRINCIPAL AND INTEREST PAYMENTS of $8,699.76 per month for 60 months beginning June 30, 2020.

PCIs owner has asked that you complete the following amortization schedule provided by the bank. The owner does NOT expect you to prepare any journal entries at this time. You plan to provide detailed supporting calculations and round all amounts to the nearest cent (6 marks).

Date	Cash Payment	Interest Expense	Reduction of Principal	Principal Balance
June 1, 2020				$450,000.00
June 30, 2020	$8,699.76
July 31, 2020	8,699.76

(Please insert response into amortization schedule and detailed supporting calculations here.)

The other option being considered is selling preferred shares to family members. According to its articles of incorporation, PCI is authorized to issue an unlimited number of preferred shares which would pay a dividend of $4 per share per year. You have been asked to prepare the journal entry (in good form) that would be required if 4,500 preferred shares were sold to family members for a total of $450,000 cash on June 1, 2020. You plan to provide detailed supporting calculations and round all amounts to the nearest dollar (1 mark).

(Please insert response here.)

PCIs owner expects the Saskatoon store to be successful. Therefore, it is expected that PCI will declare a quarterly cash dividend on September 1, 2020 to be paid to shareholders on September 30, 2020 to shareholders on record on September 15, 2020. You have been asked to prepare the journal entries (in good form) required on each of these dates. If no journal entry is required on a particular date, you must clearly state no journal entry is required. You plan to provide detailed supporting calculations and round all amounts to the nearest cent (4 marks).

(Please insert response here.)