Questions Analysis:

4. How do you think your analysis will impact the banks decision about the loan to UptownHair Salon?

Case: UPTOWN HAIR SALON

Uptown Hair Salon is a small, privately owned business in Westminster, Ontario. On November 1, 2019, Sally Que purchased all of the shares of Uptown from the previous owner, who was retiring. Sally is very ambitious. She is now seeking a $50,000 bank loan so that she can expand the business. The bank requires audited financial statements in accordance with Accounting Standards for Private Enterprises (ASPE).

It is now November 15, 2020, and your accounting firm is performing the audit for the year ended October 31, 2020. This is the first time Uptown has had an external audit. The engagement partner has asked you to review the following information and to provide advice on any issues that should be addressed. Your recommendations must include specific references to relevant CPA Handbook sections and to specific case facts. If something has been recorded properly, please make a note that no change is needed, and explain why. You should inform the client about any impact on the financial statements, including dollar amounts. It is NOT necessary to prepare any journal entries.

Uptown has 6 hair styling stations. Two of the stations are personally used by Sally. The other four are rented out to other hair stylists. Anyone that rents a station is required to sign a 24- month contract and to pay an initial upfront fee of $1,200. This fee helps cover the costs of insurance and promotion over the contract period. Because it is non-refundable, Sally records this fee as revenue when received. In addition, there is a monthly fee of $450, which includes station rental and all utilities. This fee is also recorded as revenue when received. After the 24- month contract period, stylists can continue to rent their spot on a month-by-month basis. At this time, the rate increases to $500 per month. On January 1, 2020, 4 stylists signed contracts with Uptown. Prior to January, there were no stylists renting stations at Uptown.

Uptown has a separate area in its facility that operates as a nail salon. Sally has found it difficult to hire reliable nail technicians, making this part of the business very difficult and time consuming to manage. It also requires an expensive investment in nail care products that are not being fully utilized. On August 1, 2020, Sally made a decision that she would replace this area with additional hair styling stations as soon as she could sell the nail care equipment. The equipment had an original cost of $12,000. On October 31, 2020 it had a carrying value of $8,000. Sally has conducted extensive advertising for this equipment, and she is confident that it will be sold by the end of December 2020 for $6,000. While waiting for a sale, Sally carefully continued to record monthly straight-line depreciation on the equipment based on its expected useful life of 5 years and $1,000 residual value. For fiscal 2020, the area had generated $35,000 in revenue and incurred $40,000 in expenses.