The Wong family incorporated Alberta Wholesale Limited (AWL) on January 1, 20X1 when the company issued common shares to several family members for cash. After obtaining mortgage financing, the company constructed a warehouse and began a food wholesale business.
The company has a small accounting staff that recorded transactions throughout the year. The companyâs CEO knows that cash is correct because she has reviewed the bank reconciliation. However, she was unable to hire a professionally trained CFO and is concerned that the draft financial statements prepared by her staff (Exhibit I), which are prepared using IFRS, may have errors including the final calculation of income tax expense based on a 30% income tax rate.
The CEO has hired you to correct any accounting errors made by her staff by:
1. Providing a memo listing any adjusting entries that the company needs to make along with comments explaining why the company recorded items incorrectly and how and why the company should have recorded the transaction along with supporting calculations relating to adjustments. You should have at least one adjusting journal entry (you may need several entries for some issues) for each of the following issues. If an issue deals with more than one transaction, try to have an adjusting entry for each transaction within the issue.
Issue 1
On January 1, 20X1, the company received an operating line of credit from the bank for $6,000,000. The interest rate on this line was at 5% throughout 20X1. On that same day, AWL bought land costing $2,000,000 and on that day, construction on a warehouse commenced. The company paid the building contractor $4,000,000 on each of the following three dates for a total amount spent of $12,000,000: February 1, March 1 and April 1, 20X1. The contractor completed construction of the building by April 30, 20X1. AWL also received a $10,000,000 mortgage at 4% was received from the bank on February 28, 20X1 to pay for the warehouse. The mortgage required monthly payments of $101,246 on the last day of each month commencing March 31, 20X1. Interest on the line of credit is due on the first day of each month commencing February 1, 20X1. AWL paid no portion of the principal of the line of credit during 20X1 and there are no fixed terms of repayment on the line of credit although the bank can demand repayment at any time by giving 90 days notice and requires the company to maintain a current ratio greater than 3:1. Furthermore, the debt to equity ratio cannot exceed 1.5 so the company does not want to record any more liabilities if possible.
Issue 2
The company received a government grant of $1,000,000 cash on April 30 to make the warehouse more energy efficient. When received, we recorded it in grant revenue.
The Wong family incorporated Alberta Wholesale Limited (AWL) on January 1, 20X1 when the company issued common shares to several family members for cash. After obtaining mortgage financing, the company constructed a warehouse and began a food wholesale business.
The company has a small accounting staff that recorded transactions throughout the year. The companyâs CEO knows that cash is correct because she has reviewed the bank reconciliation. However, she was unable to hire a professionally trained CFO and is concerned that the draft financial statements prepared by her staff (Exhibit I), which are prepared using IFRS, may have errors including the final calculation of income tax expense based on a 30% income tax rate.
The CEO has hired you to correct any accounting errors made by her staff by:
1. Providing a memo listing any adjusting entries that the company needs to make along with comments explaining why the company recorded items incorrectly and how and why the company should have recorded the transaction along with supporting calculations relating to adjustments. You should have at least one adjusting journal entry (you may need several entries for some issues) for each of the following issues. If an issue deals with more than one transaction, try to have an adjusting entry for each transaction within the issue.
Issue 1
On January 1, 20X1, the company received an operating line of credit from the bank for $6,000,000. The interest rate on this line was at 5% throughout 20X1. On that same day, AWL bought land costing $2,000,000 and on that day, construction on a warehouse commenced. The company paid the building contractor $4,000,000 on each of the following three dates for a total amount spent of $12,000,000: February 1, March 1 and April 1, 20X1. The contractor completed construction of the building by April 30, 20X1. AWL also received a $10,000,000 mortgage at 4% was received from the bank on February 28, 20X1 to pay for the warehouse. The mortgage required monthly payments of $101,246 on the last day of each month commencing March 31, 20X1. Interest on the line of credit is due on the first day of each month commencing February 1, 20X1. AWL paid no portion of the principal of the line of credit during 20X1 and there are no fixed terms of repayment on the line of credit although the bank can demand repayment at any time by giving 90 days notice and requires the company to maintain a current ratio greater than 3:1. Furthermore, the debt to equity ratio cannot exceed 1.5 so the company does not want to record any more liabilities if possible.
Issue 2
The company received a government grant of $1,000,000 cash on April 30 to make the warehouse more energy efficient. When received, we recorded it in grant revenue.
Related questions
Ferntree Clothing Inc. is a company that makes and sellsclothing to upscale shops across the country. In 2005, the companydecided to add the sale of fabric to the company portfolio, sellingmainly to other clothing manufacturing companies. Ferntree soonrealized that this market was unprofitable with low margins andwith the continued increase in on-line sales ,their fabric divisionwas suffering.
The companyâs current controller vacated the position withoutnotice four months ago and Ferntree has hired you as their newcontroller to make any adjustments necessary and correct any errorsyou may find. The fiscal year end is January 31, 2017 and you willneed to correct errors, make adjustments and draft financialstatements using ASPE in preparation for the annual audit. Thefollowing information has been gathered for you to work with.
The trial balance at January 31, 2017, before any adjustments isprovided on the attached excel worksheet.
Your review through the company files has led you to thefollowing information, which may require adjustments:
1. In October of 2016, the shareholders met and decided to sellthe fabric division. By December 2016, it became apparent that abuyer is unlikely to be found. The only asset of this division isthe inventory, and all attempts have been made to sell this byyear-end. The company is expected to recover the book value of theinventory as it is being carried at its current fair value. Thereare no liabilities relating to this division. (Hint: Regardless ofa buyer, this would be classified as a gain/loss from discontinuedoperations).
2. The company paid a dividend of $25,000 to its shareholders inDecember 2016. This amount was incorrectly recorded as a cost ofgoods sold for the clothing division.
3. Last years accounts payable had been paid: $25,000 for theclothing division and $15,000 for the fabric division. When theywere paid, they had been debited to cost of goods sold for clothingdivision and operating expenses for the fabric division.
4. Upon reviewing the aged accounts receivable, it is apparentthat one account in the amount $5,000 had become uncollectible andwas written off to bad debt expense. In the past, 1% of accountsreceivable had been used to estimate the allowance for doubtfulaccounts, but this year given the past history, they have decidedto increase that amount to 2% of accounts receivable. All accountsreceivable and the allowance account relate to the clothingdivision.(Hint: adjust the bad debt expense and allowance accountfirst before you adjust for the allowance for doubtfulaccounts).
5. In January 2017, some old equipment was sold for proceeds of$250 cash. The original equipment cost $5,000 and had accumulateddepreciation of $4,900. The entry made when depositing the cash wasdebit Cash, credit equipment for $250. The equipment is beingamortized using the straight-line method over 10 years.Depreciation has not been recorded for the current year for theremainder of the equipment in this account.
6. FV-NI investments are long-term investments. The fair valueof the portfolio investments at January 31, 2017 was $35,000.
7. Insurance is paid each November 30th and covers a 12-monthperiod. When the company paid the insurance, it was debited toinsurance expense.
8. The note payable is due in two equal installments of $25,000each, plus interest on January 31, 2018 and 2019. The annualinterest rate is 5% and the note has been outstanding since August1, 2016.
9. Unpaid salaries and wages amounted to $1,500 at January 31,2017 and will be paid in the first payroll of February 2017. Thesehave not been recorded.
10. In reviewing sales, it was determined that the balance inthe unearned revenue account as at January 31, 2017 should be$30,000. The entire amount relates to the clothing division.
11. Ferntree has been making some income tax installments anddebiting these payments to the Income Taxes Payable account. It hasbeen determined that the applicable tax rate is 25%. The adjustingentry needed for taxes has not been recorded yet. (Hint: do thisentry last)
Required: a) Prepare all adjusting and correcting entries basedon the above information.
b) Post these entries journal entries to the trial balance andcomplete other columns of the work in good form
c) Prepare the January 31, 2017 Combined IncomeStatement/Comprehensive Income using the Multi-step incomestatement format, Statement of Financial Position and Statement ofRetained Earnings for Ferntree Clothing Inc. for the fiscal yearended January 31, 2017
| Ferntree Clothing Inc. | January 31, 2017 | ||||||
| Unadjusted Trial Balance | Adjustments | Adjusted Trial Balance | |||||
| Account | Debit | Credit | Debit | Credit | Debit | Credit | |
| Petty Cash | 500 | ||||||
| Cash | 63,250 | ||||||
| Accounts Receivable | 252,000 | ||||||
| Allowance for doubtful accounts | 7,500 | ||||||
| Preapaid Insurance | 5,000 | ||||||
| Inventory- Clothing | 400,000 | ||||||
| Inventory- Fabric | 150,000 | ||||||
| FV-NI Investments | 30,000 | ||||||
| Equipment | 499,750 | ||||||
| Accum. Depreciation- Equipment | 200,000 | ||||||
| Goodwill | 25,000 | ||||||
| Accounts Payable | 75,000 | ||||||
| Salaries & wages Payable | 0 | ||||||
| Interest payable | 0 | ||||||
| Notes Payable | 50,000 | ||||||
| Unearned Revenue | 20,000 | ||||||
| Income tax payable | 60,000 | ||||||
| Common shares | 75,000 | ||||||
| Retained Earnings | 588,000 | ||||||
| Dividends | 0 | ||||||
| Sales Revenue- Clothing | 2,000,000 | ||||||
| Sales Revenue- Fabric | 250,000 | ||||||
| Unrealized Gain/loss- FV-NI | 0 | ||||||
| Gain/loss on disposal of equipment | 0 | ||||||
| Cost of Goods sold- Clothing | 1,200,000 | ||||||
| Cost of Goods sold- Fabric | 275,000 | ||||||
| Operating expenses-Fabric | 100,000 | ||||||
| Operating Expenses-Clothing: | |||||||
| Depreciation expense | 0 | ||||||
| Office expense | 12,000 | ||||||
| Travel expense | 4,800 | ||||||
| Insurace expense | 7,200 | ||||||
| Interest expense | 1,200 | ||||||
| Utilities expense | 2,600 | ||||||
| Rent expense | 41,000 | ||||||
| Salaries & wages expense | 125,000 | ||||||
| Supplies expense | 500 | ||||||
| Bad debt expense | 5,000 | ||||||
| Telephone & internet expense | 4,200 | ||||||
| Repairs & maintenance expense | 1,500 | ||||||
| Income tax expense | 0 | ||||||
| 3,265,500 | 3,265,500 | 0 | 0 | 0 | 0 | ||
