THE UNIONVILLE GIFT STORE Claudia Mahoney prepared this case under the supervision of John Humphrey solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. This material is not covered under authorization from CanCopy or any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing. Ivey Management Services, c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7, phone (519) 661-3208, fax (519) 661-3882; e-mail cases@ivey.uwo.ca. Copyright 1985, Ivey Management Services Version: (A) 1999-03-19 In the summer of 1983, after considerable leg work, Peter Burns was finally ready to open his own business. Having worked on a part-time basis in retail outlets throughout high school and university, he had decided that he would one day open his own store. Armed with his degree in business administration and $25,000, Burns had felt well equipped to pursue his dream. On August 1, 1983, he began operating an exclusive men's gift shop in Unionville, Ontario. One year later, Burns began examining his records in order to see how he had done. The $25,000 initially in Burns's savings account had consisted of his own hard- earned savings as well as personal loans he had secured from his friends and relatives. On the first day of operations he had gone to the bank and transferred this money into a new business account. That same day, the proceeds of a $40,000 operating loan that Burns had previously negotiated with the bank manager, were also deposited. This loan had been personally guaranteed by Burns's uncle. There was no fixed repayment schedule associated with the loan, and interest charges were to be assessed on the average outstanding balance of the loan during the year. Interest charges were to be 13 per cent per annum payable on August 1 of each year. The first interest payment would not be due until August 1, 1984. Burns's records showed the following cash disbursements during the year: Bank Loan Principal Repayment Fixtures Wages and Salaries Insurance Advertising Miscellaneous Cash Register Service Office Supplies Accounts Payable Freight Charges Total Cash Disbursements $ 31,027 30,000 20,000 33,400 600 2,800 6,596 2,748 2,700 108,067 3,000 $ 240,938 The fixtures had been purchased in early August at a cost of $30,000. They were expected to last five years at which point Burns expected to have to refurbish the store. They had been shipped from the supplier FOB shipping point at a shipping cost of $3,000. The store was located in a new indoor shopping mall, which Burns thought would help establish an exclusive image. He had rented 1,000 square feet at $20 per square foot per year. While Burns personally supervised the entire operation, he had decided to hire a manager, one full-time assistant and some part-time help. These people were all hired prior to the store opening and began working on August 1. Their wages and salaries were set as follows: Manager Assistant Part-time (total) $ 200/week 150/week 100/week Staff were paid 52 weeks of the year, always on Friday. Burns noted that his fiscal year-end (July 31, 1984) had fallen on a Tuesday. As a result, he realized that $180 of what he would pay the staff the coming Friday would be for services rendered prior to August 1. As well, he recalled that the cash paid out for wages and salaries included $10,000 that he himself had taken in drawings. Burns had initially purchased an insurance policy for full-year coverage when he began operations. Knowing this policy was due to expire at the end of July, he had gone out that month and paid $300 for a new policy which was to provide coverage from August 1, 1984, to July 31, 1985. Also, during July 1984, he had paid $500 to the local newspaper for advertising he had pre-arranged for his upcoming Labor Day sale. The internal control system in the store centered around the cash register. Burns had purchased a special register equipped with a magnetic tape reader which stored all facets of purchasing, itemized sales and inventory. The tapes were processed by an external processing centre twice monthly at a cost of $229 per month. When questioned about the miscellaneous expenses, Burns revealed that they consisted of the cash paid for minor items not specifically listed elsewhere: telephone, utilities, postage, garbage disposal, bank charges, and extra space rented temporarily for Christmas storage. During the year, total purchases amounted to $119.900, all on credit. In addition, the transportation charges associated with these purchases had been added to the purchase prices on the respective invoices, resulting in total invoice charges of $121,950. Burns was quite pleased with his suppliers, since only $3,775 worth of purchases had to be returned. Most of these goods had been damaged by the shipping company responsible. The suppliers agreed to bear the cost of the return transportation and had quickly credited the Unionville Gift Store's account in each case. Sales for the period totalled $180,200, of which $139,200 had been for cash while the remainder were made on credit. Total sales returns and allowances of $6,200, consisting of $2,060 in credit sales returns, and $4,140 in cash sales returns had been accounted for in various ways. While it was the store's policy not to refund cash when an item sold for cash was returned, $300 in cash was refunded to out- of-town customers who would have little chance of using up a credit note. The remaining $3,840 in cash sales that were returned were not given cash refunds, but rather were issued credit notes that could be used at some point in the future. To date, no one had used a credit note to obtain merchandise. When an item sold on credit was returned, the individual's account was merely credited for the amount returned. The ending balance of accounts receivable from customers was $1,000. After business closed on July 31, Burns and the manager counted the entire inventory. They found $500 of office supplies remaining and $24,900 worth of merchandise inventory. REQUIRED Record the business transactions and necessary adjusting entries for the Unionville Gift Store's first year of operations. Prepare the income statement for the 1984 fiscal year, and the balance sheet as at July 31, 1984, for the Unionville Gift Store. NOTE: Round all figures to the nearest dollar before recording entries on the accounts.