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Beauty Boost Case 2.pdf

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University of Alberta
Jocelyn King

Beauty Boost (BB) In 2010, Anthony Mascolo opened a series of spas and created his own line of beauty products. The company manufactures the beauty products in a plant in Millet, Alberta. By year-end October 31, 2013, the company had expanded considerably. The preliminary 2013 statement of earnings, and comparative statement of financial positions for 2012 and 2013, are presented in Appendix A. Revenue Recognition Anthony Mascolo is involved in discussions with his auditor over the revenue recognition policies used by the company. The company earns revenue from spa treatments and sales of beauty products both at the spa and through independent distributors. BB also sells gift certificates for its services and products. All of the beauty products are sold with the guarantee that if the customer is not completely satisfied, the product can be returned within 30 days for a full refund. In 2013, BB sold product lines, which were initially developed in 2010 and have been well tested on the market, and several new product lines sold for the first time in 2013. The following chart provides a breakdown of the revenue figure of $11,000 (all amounts reported in thousands of $) reported in BB’s statement of earnings for the year ended October 31, 2013, along with the revenue recognition policies used for each line item: Item Amount Revenue Recognition Policy (in thousands of $) A. Spa services* $5,000 After completion of the service B. Products developed in 2010* 5,000 At point of sale; sales returns and allowances estimated and recorded based on reliable historical rates of return C. Products developed in 2013* 500 At point of sale; no sales returns and allowances recorded as unable to estimate D. Gift Certificates 500 At point of sale Total $11,000 *except for products/services provided as a result of gift certificates Of the $5,000 sales of products developed in 2010, $2,000 retail value of goods was shipped to independent distributors in the final days of October. This amount represents “surplus” inventory for the distributors (that is, it is over and above the amount they would normally stock). BB asked them to accept these goods “to free space in the BB shipping areas” and told Page 1 of 4 the distributors that they need not pay until they sold the goods, which they could return for a full refund in November if they so wished. The major costs associated with the spa services are the salaries of the employees and the cost of products used. Salary is expensed as accrued, and products are expensed in the year that they are used through maintenance of a periodic inventory system. For an average spa treatment, costs equal 40% of the amount charged to the customer. For products developed in 2010, cost represents approximately 25% of the selling price, while for products developed in 2013, the costs represent 30% of the selling price. These costs are expensed when the revenue for the service or sale of the goods is recognized. The products developed in 2013 did not become available for sale until October, the final month of the fiscal year. The major product line developed in 2013 is a tanning lotion, the application of which is intended to simulate a natural tan. Anthony Mascolo was anxious to bring this product to market, and it was not tested as thoroughly on all complexion types as was typical for the company’s earlier products. 50% of the dollar value of all gift certificate sales for the year was for spa services and 50% was for products developed in 2010. 70% of the spa gift certificates and 80% of the product gift certificates sold in 2013 have also been used in 2013. (Assume there were no outstanding gift certificates from previous years.) Salaries and products associated with the gift certificates are expensed when the gift certificate is used. BB has provided for bad debt expense in the 2013 statement of earnings (included as part of general and administrative expenses.) Collections have not typically been a problem for the company. Cash Flow Statement Anthony Mascolo is pleased with BB’s growth. He gave himself a substantial raise in 2013 (see statement of earnings), purchased a 20% stake in Catwalk Hair Care (CHC), and wants to expand further in 2014. In order to do this, he has to negotiate a loan with the bank. He is therefore anxious that the company appear to be as profitable in 2013 as possible. The Bank is requiring financial statements in accordance with IFRS standards. He also requires your help in completing a statement of cash flow for the year ended October 31, 2013. Additional information necessary for the completion of this statement follows: 1. The “Due from shareholder” account represents money Anthony Mascolo borrowed from the company for personal use. 2. New equipment was purchased in 2013. No dispositions of equipment were made during the year. 3. The decrease in the patent account is exclusively due to amortization. 4. BB purchased its 20% stake in CHC entirely by issuing shares of its own stock. BB did not issue any other capital sto
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