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Ethans Easels Case 1.docx

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University of Alberta
Jocelyn King

ACC414 Case#1 Parts #1 & #2 This project will introduce you to the accounting process. You will be required to record one month’s transactions for a company, prepare an unadjusted trial balance, then record year end adjusting entries, prepare financial statements and closing entries. On the following pages is a list of all the information provided with this practice set. Following that are the instructions for completing each step and the related data. You will be asked to submit the project in two parts. The first part will be marked and returned, with feedback indicating where corrections are needed. You will be expected to make these corrections before proceeding with the second part. Note: Case #1, Part #1 is due October 9 at 3:00 pm (to be handed in in the appropriate drop box outside the General office on the 3 floor of the business building. Case #1, Part #2 is due October 30 at 3:00 pm (to be handed in in the appropriate drop box rd outside the General office on the 3 floor of the business building. Page 1 of 21 Table of Contents Page 2 of 21 (1) History of Ethan's Easels Inc. and background information Ethan's Easels Inc. (EEI) has been operating for a number of years in the Edmonton area. EEI is a manufacturer of easels. In addition, EEI also sells other high end brushes and paint. EEI is owned and managed by Ethan Escher. The company has a December 31 year end. EEI is located in a prime spot on the south side of Edmonton. Ethan's Grandfather was a famous manufacturer of artist's easels and he spent many years training Ethan in the art. As a result, Ethan has become well known for his superior easels. EEI carries on both a wholesale and a retail operation. EEI wholesales easels to local retail stores and also retails easels and other fine brushes and paint to the general public. All sales to wholesale customers are on credit. Ethan manages the business and works there full time. He has two full time employees who work for him, Karl Kandinsky and Paula Picasso. Both are paid an hourly wage. Until now, Ethan has been doing all of the bookkeeping, however as his business has expanded he has not had sufficient time to complete the books for the year ended December 31, 2013. He has done all the work up until the end of November, but has now hired you to complete the books for the current year end. Your job will be to record the transactions for the month of December and then prepare financial statements for the year ended December 31, 2013. Your starting point will be Ethan's November 30, 2013 trial balance. After you have recorded the December transactions and prepared the December bank reconciliation, your work will be evaluated. You will have an opportunity to make any corrections before completing the year-end adjusting entries and preparing the financial statements. Page 3 of 21 (2) Trial balance at November 30, 2013 Ethan has done the following: recorded and posted sales, purchases, cheques and payroll and prepared a bank reconciliation monthly. He has not prepared any adjusting entries. All of the recording of transactions is complete up to and including November 30, 2013. Please see section C for the notes to the trial balance. Page 4 of 21 Ethan's Easels Inc. Trial Balance November 30, 2013 Debit Credit Note Cash 63,012.00 1 Prepaid expenses 20,570.00 2 Accounts receivable 71,420.00 3 Allowance for doubtful accounts 2,250.00 Inventory - raw materials 18,540.00 4 Inventory - merchandise 96,760.00 4 Fixed assets 89,430.00 5 Accumulated amortization 20,325.00 Accrued expenses 281.19 10 Accounts payable 51,890.00 6 Shareholder loan 19,460.00 7 GST payable (net) 3,450.00 8 Payroll deductions payable 5,430.90 9 Bank loan 55,385.00 10 Common shares 26,400.00 11 Income tax payable 0.00 Retained earnings 110,209.91 Sales revenue 893,200.00 Purchases - raw materials 362,400.00 Purchases - Merchandise 146,700.00 4 Cost of sales Legal and professional fees 5,100.00 Bank charges and interest 625.00 12 Amortization expense Office supplies expense 1,190.00 Advertising 32,430.00 Automobile expenses 19,650.00 Meals and entertainment 9,630.00 Telephone 870.00 Wages 172,340.00 13 Rent 40,950.00 2 Insurance expense 23,400.00 2 Utilities 4,115.00 Employee benefits 9,150.00 14 Bad debt expense Income tax expense 1,188,282.00 1,188,282.00 (3) Information about specific accounts Some of this information is necessary for the completion of Part #1. Other details are for information purposes only, or may be relevant to the completion of Part #2. These notes are Page 5 of 21 provided to explain what is included in the account balances shown on the November 30, 2013 trial balance. (4) EEI has a bank account at the Central Bank of Edmonton. A copy of the November 30, 2013 bank reconciliation that Ethan prepared is as follows, and the December 31, 2013 bank statement is provided in part D. Ethan's Easels Inc. Bank Reconciliation November 30, 2013 Balance per Bank Statement 62,976.00 O/S deposits 13,326.00 76,302.00 O/S cheques Payee # Date Amount James Jones (refund) 528 1-Feb-2013 535.00 Ethan Escher 778 28-Nov-2013 5,230.00 Bonnard's Brushes 785 29-Nov-2013 3,325.00 L. Landlord-Rent 789 30-Nov-2013 4,200.00 13,290.00 Correct G/L balance 63,012.00 Unadjusted G/L balance 64,155.00 Adjustments made: Service charges 43.00 Loan payment 1,100.00 -1,143.00 JE 67 Adjusted G/L balance 63,012.00 Prepared by: EE Page 6 of 21 (5) Prepaid expenses include the following: Ethan's Easels Inc. Prepaid Expenses November 30, 2013 Rent deposit $ 8,000 Rent for January 2013 $ 3,600 Insurance $ 8,970 Total $20,570 The rent deposit was made when Ethan originally entered into the lease agreement. Rent is paid to Larry Landlord on the last day of each month for the next month. Effective for April 2013, the landlord increased the rent from $3,600 per month to $3,750. The amount Ethan has included in rent expense in the trial balance at November 30, 2013 is the total paid during 2013 to the end of November 2013. Insurance is purchased on August 1 of each year for the upcoming year. Ethan recorded the total amount paid on August 1 of 2013 in the insurance expense account. You may assume that no GST is charged on rent or insurance. (6) Ethan prepared the following listing of accounts receivable at November 30, 2013: Ethan's Easels Inc. Accounts Receivable November 30, 2013 Manet Art Mart $ 9,230 Rousseau's Art $ 11,070 Van Gogh's Paint Place $ 8,940 Warhol's Wonders $ 18,190 Chagall Chez $ 15,740 Renoir Radical $ 8,250 Totals $ 71,420 Page 7 of 21 (7) All purchases of raw materials used to produce the easels are posted to the "Purchases - raw materials" account. Purchases of brushes and paint are posted to the “Purchases - merchandise” account. On December 31, 2013, Ethan will count the both the raw materials inventory and merchandise inventory to determine how much inventory is on hand at the company year end. (8) The fixed assets were purchased in January 2010. EEI uses straight line amortization and recognizes half of a year of amortization in both of the year of acquisition and disposal. (9) Ethan has prepared the following list of Accounts Payable as at November 30, 2013. These amounts were incurred to purchase direct materials and for paint and brushes: Ethan's Easels Inc. Accounts Payable November 30, 2013 Pollock's Paints 14,620 Bonnard's 8,230 Goya's Glue 20,020 Wood by Wyeth 3,430 Holbein's 5,590 Total 51,890 (10) The shareholder loan account represents the amount that EEI currently owes Ethan as a result of Ethan advancing funds to the company, the company paying some personal amounts for Ethan and Ethan personally paying some of the company expenses. (11) EEI pays its GST monthly on the 15th of each month for the previous month. A single GST account is used to record GST payable (i.e., billed to customers) and GST receivable (i.e., paid to suppliers). The net amount is either paid to CRA, or if payments exceed collections, then claimed as a rebate. Assume that all amounts with the exception of rent, insurance, interest and wages are subject to GST. For those amounts that are subject to GST, GST has been included in the amounts given. GST is at 5%, so to determine how much GST has been included in an amount multiply the amount by 5/105. Page 8 of 21 (12) Payroll deductions payable at November 30, 2013 include the following amounts: Ethan's Easels Inc. Payroll Deductions Payable November 30, 2013 Income taxes 4,210.00 Canada Pension Plan (CPP) 842.00 Employment Insurance (EI) 378.90 Total owing 5,430.90 Both the employee and the employer are required to contribute to CPP and EI. The required contribution by the employer for CPP is equal to the employee’s required contribution while the required contribution for EI is equal to 1.4 times the employee’s required contribution. (13) The bank loan was made in order to purchase fixed assets and the fixed assets have been pledged as security. Loan payments of $1,100 (blended principal and interest) are made on the first of each month. The annual interest rate on the loan is 6% and the amount of accrued expenses included in the trial balance is interest for the month of December 2012. Ethan has recorded all loan payments made during 2013 as a reduction in the bank loan account. Assume interest charges are calculated by rounding to the nearest whole month, not on a daily basis. (14) EEI’s articles of incorporation authorize an unlimited number of common voting shares to be issued. There are no other authorized classes of shares. Shares were issued as follows: Ethan Escher 150 shares @ $176 per share (15) The account “Bank charges and interest” includes monthly bank service charges and should also include interest on the bank loan once this has been calculated. (16) EEI pays its two hourly employees every second Friday. December pay period dates were December 9 and December 24. December payroll cheques are listed in the cheque listing (item H). Ethan receives a monthly salary that is paid on the last day of the month. As the owner of the business, Ethan is exempt from EI. This means no EI is deducted from his pay cheque and no EI is remitted for him by EEI. (17) The employee benefits account includes the employer portion of CPP and EI. Page 9 of 21 (18) Bank Statement December 31, 2013 Central Bank of Edmonton University Campus Branch 8888 - 111 Street Edmonton, Alberta T5T 5T5 Customer: Statement date Dec. 31/2013 Ethan's Easels Inc. 10800 – 82A Avenue Edmonton, Alberta T6T 6T6 Date Trans type Ref # Debit Credit Balance 30-Nov-2013 BF 62,976.00 2-Dec-2013 DEP 13,326.00 76,302.00 2-Dec-2013 LOAN PMT 1,100.00 75,202.00 2-Dec-2013 CHEQUE 789 4,200.00 71,002.00 2-Dec-2013 CHEQUE 778 5,230.00 65,772.00 3-Dec-2013 DEP 6,540.00 72,312.00 6-Dec-2013 CHEQUE 785 3,325.00 68,987.00 9-Dec-2013 DEP 11,070.00 80,057.00 11-Dec-2013 CHEQUE 790 185.00 79,872.00 11-Dec-2013 DEP 8,940.00 88,812.00 12-Dec-2013 CHEQUE 791 565.00 88,247.00 12-Dec-2013 CHEQUE 792 1,766.40 86,480.60 12-Dec-2013 DEP 18,190.00 104,670.60 16-Dec-2013 CHEQUE 793 1,583.60 103,087.00 17-Dec-2013 CHEQUE 797 25,440.00 77,647.00 17-Dec-2013 CHEQUE 796 3,430.00 74,217.00 17-Dec-2013 DEP 7,870.00 82,087.00 18-Dec-2013 DEP 18,590.00 100,677.00 19-Dec-2013 CHEQUE 794 5,430.90 95,246.10 19-Dec-2013 CHEQUE 795 3,450.00 91,796.10 23-Dec-2013 DEP 7,890.00 99,686.10 23-Dec-2013 CHEQUE 798 13,650.00 86,036.10 27-Dec-2013 CHEQUE 801 5,590.00 80,446.10 27-Dec-2013 CHEQUE 802 1,842.30 78,603.80 27-Dec-2013 VISA PAY.* 3,820.00 74,783.80 27-Dec-2013 CHEQUE 799 20,020.00 54,763.80 30-Dec-2013 DEP 3,780.00 58,543.80 31-Dec-2013 CHEQUE 803 1,621.50 56,922.30 31-Dec-2013 SERVICE CHG 44.00 56,878.30 * Details of the visa payment were as follows: Meals and entertainment (all client related) 940.00 Au
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