Suzanne Chris Goods

Suzanne Chris has been an avid sports enthusiast since her early days of playing soccer for her city team. Suzanne

continued to play soccer throughout high school and university. She recognized during those early years of soccer that

staying fit was a critical ingredient in performing well in any sport and for staying healthy in general. So it was no

surprise when Suzanne announced that she would pursue her dream of opening a fitness facility. Three years ago,

Suzanne earned her degree in physical education. Suzanne thought it would be useful to add to her skill set so she

recently received a certificate in personal training. Once she completed the course she put all her energy into preparing

a business plan and doing the ground work for her new business. Knowing Suzanne's love for sports and fitness, her

parents fully sup- ported her business decision.

Suzanne began to spread the news by "word of mouth" that she would soon open her own fitness and training facility.

Suzanne hired some high school students to deliver flyers that she designed and had printed at a local print shop. She

paid the students a total of $500 to deliver the flyers to neighbourhoods within 10 km of her business location. Her

dream came true on February 1, 2020. Suzanne Chris Goods (SCG) officially opened its doors to its first customers.

The first 20 visitors received a one-year free membership. Suzanne believed this would encourage the first 20 visitors

to share their positive experience with their friends and encourage them to become new paid members.

Prior to opening on February 1, 2020. Suzanne signed a five-year lease to rent the premises where she would conduct

business. The premises had been previously used by a fitness club so all the necessary amenities, such as a reception

area, showers, and fitness rooms, were ready for use. On January 2, 2020, she paid the landlord a $1,000 security

deposit for any damages that may be caused by her business while renting the premises. The security deposit would

be returned at the end of the lease minus any costs to repair damage from other than normal usage. In addition, Suzanne

paid for the first month's rent in the amount of $500. She also gave the landlord 11 cheques, one for each month in the

coming year. To comply with the terms of the lease agreement Suzanne arranged for property and personal insurance

for the period February 1, 2020, to January 31, 2021.

Suzanne also purchased equipments such as mats, balls, skipping ropes, and hand weights. She spent a total of

$3,000 for these equipments. Suzanne is hoping that the equipment will last more than one year as this will help to

preserve cash in the company. She also purchased a computer and an "off-the-shelf" software package commonly

used for businesses such as SCG.

In addition to the flyers that cost her $400 to design and print, Suzanne advertised in a local newspaper. The

advertising was going to run for four weeks starting February 14, 2020.

After studying various pricing structures at other fitness and training facilities, Suzanne decided to offer the

following pricing structure:

1. One-year membershippaid in full on the date of joining: $500 per membership

2. One-year membershippaid in two equal installments: $600 per membership paid one-half on the date of

signing the membership contract and one-half six months later

3. One-year membershippaid in 12 equal installments: $720, the first one paid on the date of signing the

membership contract. Monthly payments of $60 per month paid every 30 days from the first payment date.

The membership allows full use of the fitness facilities during all hours of operation.

Suzanne plans to work at the club 7 days a week for 10 hours a day. Knowing that she cannot operate the club

alone, she hired one full-time trainer and one part-time trainer. In order to entice these two well-known trainers, she

offered them each a signing bonus: $1,000 for the full-time trainer and $500 for the part-time trainer. In addition to

their competitive salary, she offered them a 5% bonus based on annual membership revenues. Suzanne hopes that this

will encourage the trainers to promote the business and bring in new members.

Suzanne soon realized that all these costs were adding up quickly. She decided to approach a local bank where she

had been a customer for several years. She asked the bank manager if she could borrow $10,000 to get the business

started. The bank reviewed her business plan and felt comfortable with lending her the money given that Suzanne had

personally invested $20,000 into the business. The terms of the loan required Suzanne to maintain a positive working

capital and to provide monthly unaudited statements within 10 days of month end plus annual financial statements

reviewed by a public accountant.

8/1/2019 7:03:45 PM

Given these bank requirements and having only studied first-year accounting, she decided to seek some accounting advice. Suzanne texted you, a former university roommate who is now preparing for the CPA examinations, to ask if you could meet. You agree to meet Suzanne on February 25 at the fitness facility.

Suzanne has several questions about how to account for the recent business transactions. Specifically, she needs to understand what revenues and expenses will be reported in the first month end's financial statements. She wants to understand the alternatives if any exist. In addition, she wants to understand what type of entity she should use for this business venture.

Required

1. Identify four users of the financial statements and what their primary prupose is for using the financial statements for (4 marks)

2. Which GAAP should SCG use and why? (2 marks)

3. For the following issues, identify what the accounting issue is, what are the possible alternatives under GAAP, evaluate those alternatives and provide a recommendation that is supported by your analysis and/or case facts. (20 marks)

a. Advertising and promotional expenditures

b. Lease costs

c. Equipment expenditures

d. Membership revenue

4. Evaluate the advantages and disadvantages of two business structures that Suzanne should be considering. Provide a recommendation that is consistent with case facts. (8 marks)