Sandys Grocery Inc. (SGI) owns and operates a chain of six grocery stores located throughout Nova Scotia. The stores are located in rural communities and SGIs head office is located in Halifax. Because SGI stores provide jobs within small, rural communities and SGIs head office has a policy of employing individuals coping with mental and physical disabilities, SGI receives some grant funding from the Nova Scotia Department of Community Services (DCS). DCS requires that SGIs financial statements be audited each year. Details of the grant funding agreement between SGI and DCS are included in Exhibit 1.

You have been the auditor of SGI for many years and have a good working relationship with SGIs sole shareholder, Sandy Marcus. You admire Sandys integrity and commitment to improving his community and are impressed with how SGIs corporate culture reflects Sandys core values. You recently met with Sandy to discuss the upcoming audit for the year ending 28 February 2019. Notes from your meeting, which took place on 25 March are as follows:

• Sandy hired a new manager of accounting in November 2018. Marci Lucas is a professional accountant and is now in charge of accounting and finance for SGI. Marci has already made some year-end adjustments to the financial statement so that everything is in good shape for the visit from the auditors. (These journal entries, which include Marcis supporting notes, are in Exhibit 2.)

• Sandy, who knows little about accounting has recently been taking an on-line accounting class to help him develop a basic understanding of GAAP and financial reporting requirements. He is currently learning about accounting for bad debts and thinks that SGI should switch to the allowance method. He knows that the direct write-off method has been used in the past and is surprised that you (as his auditor) have signed off on it, since this method is not recommended per GAAP. He would like you to explain your position on this issue.

• Sandy is in the process of designing a bonus plan for SGI employees. The bonuses paid will be based on earnings of SGI. The tentative bonus calculation will call for all earnings before taxes and bonuses in excel of $100,000 to be paid out as bonuses. The first bonus will be based on next years reported earnings before taxes and bonuses (i.e., earnings for the year ending 28 February 2020). Sandy believes this calculation will result in a generous bonus pool, since SGIs earnings beforetaxes historically averages $200,000 - $250,000.

  Required:

  Prepare a memo to your client analyzing any financial reporting and other issues you identify. Identify any additional information you will need from your client to resolve these issues.

EXHIBIT 1

(Excerpts from) GRANT FUNDING AGREEMENT BETWEEN:

SANDYS GROCERY INC (SGI) AND NOVA SCOTIA DEPARTMENT OF COMMUNITY SERVICES (DCS)

Clause 2: On an annual basis, DCS will reimburse SGI for 10% of the total salary and wage expenses incurred by the six grocery stores. The following condition must be met in order to receive the above reimbursement:

At least 30 individuals in total must be employed on a full-time basis by the six SGI grocery stores.

Clause 3: On an annual basis, DCS will reimburse 50% of salary and wage expenses paid to employees who are coping with physical or mental disabilities. Any physical and mental disabilities must be documented by a medical doctor.

Claus 5: Salary and wage expenses per the audited annual financial statements will form the basis for the reimbursement calculations. Detailed records must be kept for salaries and wages such that a DCS auditor can easily track what was reported as salaries and wages for the different categories of employees (i.e., employees with mental or physical disabilities must be tracked separately). SGI is responsible for calculating the reimbursement owing and submitting the claim to DCS within 60 days of each fiscal year- end.

Claus 6: A DCS auditor may be assigned to audit SGIs reported salary and wage expenses without notice. Any abuse discovered in the preparation of a reimbursement claim will result in a cancellation of this agreement.

AJE#1:

EXHIBIT 2

MARCIS ADJUSTING JOURNAL ENTRIES FOR THE YEAR ENDING 28 February 2019

Sales returns and allowances 5,000 Allowance for sales returns

5,000

Supporting notes: SGI grocery stores sold a bulk order to McMichael Distributors, a company that has been supplying grocery items to communities in the far north for the past three years. McMichael sends a container load of nonperishable groceries to a community, for re-sale to residents. McMichael can often sell for less than the conventional-and expensive-grocery store in the community but takes the risk that they send items in the container that no one wishes to purchase. SGI agreed that McMichael had six months to pay but the SGI bookkeeper feels that some products might be returned if sales are low.

AJE#2:

Salaries and wage expense Repairs and maintenance expense

Building

14,000 15,000

Supporting notes: During the year, a lot of work was done to the head office building. This was capitalized in asset accounts by the SGI bookkeeper. However, it is better classified as expense for the period. Details as to the costs incurred are as follows:

The building roof was reshingled at a cost of $12,000. The shingles are made of tin, and cost more than the standard shingles but the roofer assured me the extra cost would be worth it as tin shingles to not need to be replaced as often as regular shingles. It was good that we completed this repair as the roof was leaking prior to fixing it. Additional insulation was added to the building at a cost of $7,000. We also had the exterior of the building repainted at a cost of $10,000. Of the total cost incurred of $29,000, I recorded the portion relating to the labour charges as salaries and wage expense and the portion relating to materials used as repairs and maintenance expense. I believe this will better reflect how much we spent on actual materials versus the labour for the trades people hired to perform the work.

AJE#3:

To be determined . . .

Supporting notes: The reimbursement for eligible salary and wages expenses for fiscal 2019 has yet to be prepared. I have been too busy with my other responsibilities to prepare this calculation. I plan to record this in late April, in the 2020 fiscal year, after I have the audit behind me and the financial statements are issued.