W19 1. Prenan ACCOUNTING FUNDAMENTALS SHMON SALES (W19)LTD Due March 5, 2019 Kirk Shimon sat slumped over his office desk frustrated and angry. He wondered if it had been a wise decision after all to create a business partnership with his wife Pauline. They had worked well together up to this point but now they could not seem to resolve their current differences. Kirk wanted them to withdraw $30,000 each out of the partnership to use as down payment on a beautiful new home on Arbour Lake. Time was of the essence because there were only a few lake front properties left and Kirk was afraid the one he wanted would go fast. He believed a bonus was just reward for closing a big sales contract with a new customer. Shimon Sales Ltd. (SSL) was finally on its feet and he felt now was the time for some pay back for all the hard work. Kirk and Pauline had begun SSL when they were laid off from their respective oil companies within three months of each other. They decided to follow their dream and create their own retail business with the proceeds of their layoff packages. They invested equal amounts to buy the business, but Pauline worked only part-time in the office allowing her to be at home part-time with the children. Net Income was consequently allocated 60% to Kirk and 40% to Pauline. The first two years had been very difficult, but sales had recently taken off and Kirk felt a greater return was justifiable. Their drawings had been minimal to this point and all the cash had been ploughed back into the business. Now they had cash sitting in the bank Why not use it for something personal? Pauline argued that they needed to "stay the course" and keep the money in the company. She insisted the cash was needed to meet their short-term obligations. In fact, Pauline was worried that the new contract would make their cash position worse, not better, and that they may have to approach the bank for an increase to their loan to finance the anticipated inventory investment. Kirk realized he needed some hard numbers to support his arguments. A list of SSL accounts, in alphabetical order, was just off the system so he settled down to prepare financial statements. His preliminary review uncovered the following transactions had not yet been recorded when SSL's bookkeeper took an unexpected sick leave. Note: All SSL sales were made on account with terms of 2/10,n/30, FOB destination. Dec 2 SSL had invoiced Cleat Business Systems for merchandise sold on account Dec 2 Received a bill from Tim's Trucking for $750, n/30 for shipping merchandise Dec 3 Purchased inventory of $2,600 on account 2/15, n30, FOB destination. The cost Dee 4 Invoiced Shag Services for merchandise sold on account, $3,000 (cost: $1,500) $15,000 (cost: $7,500). earlier in the day to Cleat. of shipping was $400. Winter 2019 Page 1 of 4 ACCOUNTING FUNDAMENTALS Dec 6 Dec 12 Dec 14 Shag Services negotiated a $500 allowance on the Dec. 4 sale due to incorreet size of products shipped. Received cheque from Cleat Business Systems for the amount owing from the Dec. 2 invoice, net of discount. Received cheque from Shag for the Dec 4 sale, net of discount. amount to $12,375. Terms 1/10, n/30, FOB shipping point. previous day quality concerns. Dec 15 Purchased inventory on account with a list price of $13,750 from Port Industries for a volume Dec 16 Paid $600 cash for transportation charges on inventory purchased from Port the Dec 18 Returned for credit of $1,400 inventory purchased from Port, on Dec 16, due to Dec 20 Sold merchandise on account to Kower Outlets for $16,130 (cost: $8,065). Refunded $900 to Kower for merchandise returned because of an incorrect purchase order. The items cost $450 and were returned to the shelves for resale. Purchased stationary and miscellaneous office supplies on account, $1,760. Made payment of the full amount owing to Port Industries for merchandise purchased on Dec 15. Paid $20,625 cash for office equipment from Southern Alta Designs. Dec 21 Dec 23 Dec 24 Dec 29 Kirk also found on his desk: a) A property tax bill from the city of $6,000 which was not yet recorded. b) A note from his admin assistant stating that Supplies on hand were $5,250. c) An estimate from his accountant calculating amortization to be: i. Car- $5,000 ii. Equipment- $19,600 ii. Building- $25,400 d) A real estate association release stating the average increase in land value in SSL's neighbourhood was 5% in 2017. A bank statement indicating that $2,000 of interest had accrued at year end. Half of the outstanding loan would be payable in equal monthly instalments over the coming year. e) ) A text from his son reminding him to bring home the cool lamp Kirk has bought as part of the Dec 29th order from Southern Alta Designs. He was able to use the company discount and get it for only $75, down from the suggested list price of S100. It was to be a late Christmas present for his son's bedroom. SSL hired a student to count the inventory in the warehouse on December 31. She had not yet been paid the $500 promised her. The year-end inventory was valued at $479,180 which was significantly up from last year-end's inventory of S325,000. g) 243,750 locn 7 20,312 ACCOUNTING FUNDAMENTALS Alphabetical List of Accounts Shimon Sales Ltd Accounts payable Accounts receivable Accumulated Amortization; Building Accumulated Amortization; Car Accumulated Amortization; Equipment Bank loarn Building Car Cash Cost of Goods Sold Delivery expense Equipment Interest expense Inventory Kirk Shimon, capital Kirk Shimon, withdrawals Land Other expense $ 278,250 182,375 157,600 9,375 59,500 487,500 375,000 30,000 75,000 1,239,975 13,125 300,000 16,700 485,775 603,750 48,000 1,316,225 6,000 402,500 32,000 18,000 2,699,770 25,000 50,000 25,625 471,145 11,700 Pauline Shimon, capital Pauline Shimon, withdrawals Property taxes expense Sales Sales discounts Sales returns & allowances Supplies (Prepaid) Wages & Salary expense Wages Payable ACCOUNTING FUNDAMENTALS REQUIRED Prepare T-accounts for SSL for the year ended December 31, 2017. Include all closing entries (75%). Hint: to ensure the T-sheet begins in balance convert the list of accounts into a trial balance. Use the excel file in the accompanying worksheet to avoid errors. Note: 1. Round all figures to the nearest dollar .Show your calculations. . Use a number trail for all T-account entries. 2. Prepare Classified Balance Sheet (5%) 3. Ratio Analysis (1596) a) Current Ratio b) Debt Ratio c) Inventory Tunover d) Gross Margin Percentage, e) Return on Equity. For each ratio show the calculation, describe the general purpose of the ratio, analyze it specifically for SSL and include the implications it has for the company. Hint: putting the information in a chart format will help avoid missing anything. (15%) Comment of whether Kirk and Pauline should: a) Each draw $30,000 from SSL, or b) Approach their banker for a loan increase, or c) Do nothing. Support your remarks with an evaluation of SSL's financial position. You may include questions you would like to ask Kirk & Pauline. Hint: make at least five points to earn five marks. 4. W19 1. Prenan ACCOUNTING FUNDAMENTALS SHMON SALES (W19)LTD Due March 5, 2019 Kirk Shimon sat slumped over his office desk frustrated and angry. He wondered if it had been a wise decision after all to create a business partnership with his wife Pauline. They had worked well together up to this point but now they could not seem to resolve their current differences. Kirk wanted them to withdraw $30,000 each out of the partnership to use as down payment on a beautiful new home on Arbour Lake. Time was of the essence because there were only a few lake front properties left and Kirk was afraid the one he wanted would go fast. He believed a bonus was just reward for closing a big sales contract with a new customer. Shimon Sales Ltd. (SSL) was finally on its feet and he felt now was the time for some pay back for all the hard work. Kirk and Pauline had begun SSL when they were laid off from their respective oil companies within three months of each other. They decided to follow their dream and create their own retail business with the proceeds of their layoff packages. They invested equal amounts to buy the business, but Pauline worked only part-time in the office allowing her to be at home part-time with the children. Net Income was consequently allocated 60% to Kirk and 40% to Pauline. The first two years had been very difficult, but sales had recently taken off and Kirk felt a greater return was justifiable. Their drawings had been minimal to this point and all the cash had been ploughed back into the business. Now they had cash sitting in the bank Why not use it for something personal? Pauline argued that they needed to "stay the course" and keep the money in the company. She insisted the cash was needed to meet their short-term obligations. In fact, Pauline was worried that the new contract would make their cash position worse, not better, and that they may have to approach the bank for an increase to their loan to finance the anticipated inventory investment. Kirk realized he needed some hard numbers to support his arguments. A list of SSL accounts, in alphabetical order, was just off the system so he settled down to prepare financial statements. His preliminary review uncovered the following transactions had not yet been recorded when SSL's bookkeeper took an unexpected sick leave. Note: All SSL sales were made on account with terms of 2/10,n/30, FOB destination. Dec 2 SSL had invoiced Cleat Business Systems for merchandise sold on account Dec 2 Received a bill from Tim's Trucking for $750, n/30 for shipping merchandise Dec 3 Purchased inventory of $2,600 on account 2/15, n30, FOB destination. The cost Dee 4 Invoiced Shag Services for merchandise sold on account, $3,000 (cost: $1,500) $15,000 (cost: $7,500). earlier in the day to Cleat. of shipping was $400. Winter 2019 Page 1 of 4 ACCOUNTING FUNDAMENTALS Dec 6 Dec 12 Dec 14 Shag Services negotiated a $500 allowance on the Dec. 4 sale due to incorreet size of products shipped. Received cheque from Cleat Business Systems for the amount owing from the Dec. 2 invoice, net of discount. Received cheque from Shag for the Dec 4 sale, net of discount. amount to $12,375. Terms 1/10, n/30, FOB shipping point. previous day quality concerns. Dec 15 Purchased inventory on account with a list price of $13,750 from Port Industries for a volume Dec 16 Paid $600 cash for transportation charges on inventory purchased from Port the Dec 18 Returned for credit of $1,400 inventory purchased from Port, on Dec 16, due to Dec 20 Sold merchandise on account to Kower Outlets for $16,130 (cost: $8,065). Refunded $900 to Kower for merchandise returned because of an incorrect purchase order. The items cost $450 and were returned to the shelves for resale. Purchased stationary and miscellaneous office supplies on account, $1,760. Made payment of the full amount owing to Port Industries for merchandise purchased on Dec 15. Paid $20,625 cash for office equipment from Southern Alta Designs. Dec 21 Dec 23 Dec 24 Dec 29 Kirk also found on his desk: a) A property tax bill from the city of $6,000 which was not yet recorded. b) A note from his admin assistant stating that Supplies on hand were $5,250. c) An estimate from his accountant calculating amortization to be: i. Car- $5,000 ii. Equipment- $19,600 ii. Building- $25,400 d) A real estate association release stating the average increase in land value in SSL's neighbourhood was 5% in 2017. A bank statement indicating that $2,000 of interest had accrued at year end. Half of the outstanding loan would be payable in equal monthly instalments over the coming year. e) ) A text from his son reminding him to bring home the cool lamp Kirk has bought as part of the Dec 29th order from Southern Alta Designs. He was able to use the company discount and get it for only $75, down from the suggested list price of S100. It was to be a late Christmas present for his son's bedroom. SSL hired a student to count the inventory in the warehouse on December 31. She had not yet been paid the $500 promised her. The year-end inventory was valued at $479,180 which was significantly up from last year-end's inventory of S325,000. g) 243,750 locn 7 20,312 ACCOUNTING FUNDAMENTALS Alphabetical List of Accounts Shimon Sales Ltd Accounts payable Accounts receivable Accumulated Amortization; Building Accumulated Amortization; Car Accumulated Amortization; Equipment Bank loarn Building Car Cash Cost of Goods Sold Delivery expense Equipment Interest expense Inventory Kirk Shimon, capital Kirk Shimon, withdrawals Land Other expense $ 278,250 182,375 157,600 9,375 59,500 487,500 375,000 30,000 75,000 1,239,975 13,125 300,000 16,700 485,775 603,750 48,000 1,316,225 6,000 402,500 32,000 18,000 2,699,770 25,000 50,000 25,625 471,145 11,700 Pauline Shimon, capital Pauline Shimon, withdrawals Property taxes expense Sales Sales discounts Sales returns & allowances Supplies (Prepaid) Wages & Salary expense Wages Payable ACCOUNTING FUNDAMENTALS REQUIRED Prepare T-accounts for SSL for the year ended December 31, 2017. Include all closing entries (75%). Hint: to ensure the T-sheet begins in balance convert the list of accounts into a trial balance. Use the excel file in the accompanying worksheet to avoid errors. Note: 1. Round all figures to the nearest dollar .Show your calculations. . Use a number trail for all T-account entries. 2. Prepare Classified Balance Sheet (5%) 3. Ratio Analysis (1596) a) Current Ratio b) Debt Ratio c) Inventory Tunover d) Gross Margin Percentage, e) Return on Equity. For each ratio show the calculation, describe the general purpose of the ratio, analyze it specifically for SSL and include the implications it has for the company. Hint: putting the information in a chart format will help avoid missing anything. (15%) Comment of whether Kirk and Pauline should: a) Each draw $30,000 from SSL, or b) Approach their banker for a loan increase, or c) Do nothing. Support your remarks with an evaluation of SSL's financial position. You may include questions you would like to ask Kirk & Pauline. Hint: make at least five points to earn five marks. 4