AFA 100 Lecture Notes - Lecture 4: Seneca College, Washing Machine, Costco

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ochregnat479

27 Jul 2017

School

Ryerson University

Department

Accounting

Course

AFA 100

Professor

Jason Chin- Tiong Chan

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Document Summary

The following are independent situations that require professional judgement for determining when to recognize revenue from the transactions: costco sells you a one-year membership with a single, one-time upfront payment. This non-refundable fee is paid at the time of signing the contract, and entitles you to shop at. Costco for one year: dot home and patio sells you patio furniture on a no money down, no interest, and no payments for one year promotional deal. The furniture is delivered to your home the same day: the toronto blue jays sell season tickets on-line to games in the rogers centre. Fans can purchase the tickets at any time, although the season does not officially begin until april 1. The season runs from april 1 through october each year. Payment is due in full at the time of purchase: cibc lends you money in august.

Related Questions

Natalie Lawson spent much of her youth playing sports. Shepassed many hours on the soccer field and in the dance studio. AsNatalie grew older, her passion for healthy living continued as shestarted practising yoga. Now, at the start of her second year incollege, Natalie is investigating various possibilities forstarting her own business as part of the requirements of theEntrepreneurship program she is taking. A long-time friend insiststhat Natalie has to somehow include healthy living in her businessplan and, after a series of brainstorming sessions, Natalie settleson the idea of operating a smoothie business. She will start on apart-time basis. She will make the product at home, bottle it, andtake it to the yoga studio where she exercises because they haveagreed to purchase it on a regular basis. Now that she has startedthinking about it, the possibilities seem endless. During thesummer, she will concentrate on fresh fruit and vegetablesmoothies. The first difficult decision is coming up with theperfect name for her business. In the end, she settles on âHealthySmoothiesâ and then moves on to more important issues.

During the month of April 2017, the following activities takeplace:

Apr.	12	Natalie cashes her Canada Savings Bonds and receives $980, whichshe deposits in her personal bank account.
	13	She opens a bank account under the name âHealthy Smoothiesâ andtransfers $900 from her personal account to the new account.
	15	Natalie realizes that her initial cash investment is not enough.Her mother lends her $3,000 cash, for which Natalie signs aone-year, 3% note payable in the name of the business. Nataliedeposits the money in the business bank account.
	18	Natalie pays $325 to advertise in the April 20 issue of hercommunity newspaper. Natalie hopes that this ad will generaterevenue during the months of May and June.
	20	She buys supplies, such as protein powder, cups, straws, andfresh fruit and vegetables, for $198 cash.
	22	Natalie starts to investigate juicing machines for her business.She selects an excellent top-of-the-line juicer that costs $825.She pays for it using her own personal account.
	23	Natalie prepares her first batch of smoothies to bring to theyoga studio. At the end of the first day, Natalie leaves an invoicefor $300 with the studio owner. The owner says the invoice will bepaid sometime in May.
	24	A $98 invoice is received for the use of Natalie's cell phone.The cell phone is used exclusively for the SantÃ© Smoothiesbusiness. The invoice is for services provided in April and is dueon April 30.
	28	The yoga studio where Natalie sold her first smoothies orderssmoothies for the next month. Natalie is thrilled! She receives$125 in advance as a down payment.

PART 1: APRIL MONTH (33 marksavailable)

Requirement 1: Natalie has hired youto be her bookkeeper. Prepare the required journalentries for the above events. Explanations are notrequired and round to the nearest dollar. (17 marks)

Requirement 2: Post the entries tothe general ledger using the t-account format. (9marks)

Requirement 3: Prepare theunadjusted trial balance as of July 31, 2013. (7 marks)

PART 2: APRIL MONTH END (36marks)

It is the end of April and Natalie has been in touch with hermother. Her mother is curious to know if Natalie has beenprofitable and if Natalie requires another loan to help finance herbusiness. Natalie too would like to know if she has been profitableduring her first month of operation. Natalie realizes that, inorder to determine SantÃ© Smoothies' income, she must first makeadjustments. Natalie puts together the following additionalinformation:

1. A count reveals that $105 of supplies remain at the end ofApril.

2. Natalie was invited to deliver smoothies to a summer barbecueat her local community centre. At the end of the day, she left aninvoice for $175 with the facility manager. Natalie had not hadtime to record this invoice in her accounting records.

3. Because there were so many guests expected to attend thebarbecue in item 2, she asked a friend to help with making thesmoothies and promised to pay her $12 an hour. The payment to herfriend was made on May 4, 2017, for four hours of work.

4. Natalie estimates that all of her equipment will have auseful life of three years or 36 months. (Assume Natalie decides torecord a full month's worth of depreciation, regardless of when theequipment was acquired by the business.)

5. Recall that Natalie's mother is charging 3% interest on thenote payable extended on April 15. The loan plus interest is to berepaid in 12 months. (Calculate interest to the nearest month.)

Requirement 4: Prepare the necessaryadjusting journal entries. (10 marks)

Requirement 5: Post the adjustingjournal entries. (15.5 marks)

Requirement 6: Prepare the adjustedtrial balance. (10.5 marks)

PART 3: FINANCIAL STATEMENTS (19marks)

Natalie had a very busy May. At the end of the month, Nataliejournalized and posted her adjusting entries, and prepared thefollowing adjusted trial balance at May 31, 2017:

HEALTHY SMOOTHIES Adjusted Trial Balance May 31, 2017
	Debit	Credit
Cash	$3,060
Accounts receivable	675
Supplies	95
Equipment	1,550
Accumulated depreciationâequipment		$66
Accounts payable		88
Unearned revenue		100
Interest payable		11
Notes payable, 3%, principal and interest due April 15, 2018		3,000
N. Koebel, capital		1,725
Revenue		1,225
Advertising expense	325
Salaries expense	48
Telephone expense	174
Supplies expense	211
Depreciation expense	66
Interest expense	11
	$6,215	$6,215

Using the information in the adjusted trial balance, do thefollowing:

Requirement 7: Prepare an incomestatement for the two months ending May 31, 2017. (5 marks)

Requirement 8: Prepare the Statementof Ownerâs Equity for the two months ended May 31, 2017,(3marks)

Requirement 9: Prepare a ClassifiedBalance Sheet at May 31, 2017. (8 marks)

Requirement 10:Calculate Healthy Smoothies'

current ratio and acid-test ratio. (2 marks)

Comment on Healthy Smoothiesâ liquidity. (1 marks)

PART 4: CLOSING (12 marks)

Requirement 11: Natalie has decidedthat her year-end will be May 31, 2017. Prepare closing entries.(5.5 marks)

Requirement 12: Prepare apost-closing trial balance. (6.5 marks)

erinscorpion774

It is now late May 2018 and you, CPA, have just finished meetingwith your partner, Ms. Wong. Ms. Wong wants your help with someclients of hers.

One client, Garden Supplies Co. (GSC) has had a new shareholderbuy shares. Ms. Wong wants you to tell her if GSC is a resident ofCanada for tax purposes in 2018 and describe the personal taxconsequences that Mrs. Gardiner will have from her 2018 share sale.You can ignore the acquisition of control rules. Also, given thelist of GSCâs 2018 expenditures in Exhibit I, calculate the total2018 expenses that are deductible in 2018 when computing net incomefor tax purposes. GSC is very profitable and wants to claim themaximum amount of deductions possible. You do not need to commenton non-deductible items.

Note: Additional information about GSC is provided in ExhibitI.

Another client, Mr. Rich, who is a non-resident of Canada, hasjust purchased a newly built townhouse in Canada for $1,500,000that he plans to rent out. The home was purchased on May 1, 2018and will be rented out starting on July 1, 2018. What Canadianincome tax obligations will Mr. Rich face in 2018? If you have anyrecommendations that will reduce Mr. Richâs Canadian income taxobligations (in 2018 or in future years) with respect to his rentalproperty, then you should provide them. Additional informationabout Mr. Rich is provided in Exhibit II.

Ms. Wong wants you to draft a memo to her answering herquestions. She says you can ignore provincial income taxes, ignoreforeign taxes and ignore any income tax treaties. Explain youranswers, show all your detailed calculations and give IncomeTax Act (ITA) section, subsection and paragraph (whereapplicable) references and Income Tax Regulations sectionand subsection references in order to support your answers. Whengiving references you must be specific. Do not just list multiplereferences!

Exhibit I

Garden Supplies Co.

Garden Supplies Co (GSC) is a private company that wasincorporated in Canada in 1963 by Mr. Taft. Mr. Taft subscribed for1,000 common shares in return for $100 (in aggregate). GSC does nothave any other shares outstanding

GSC has a December 31^st year-end and its board ofdirectors meetings are typically held in the United States(U.S.)

GSC operates gardening supply stores in Canada and it startedwith one store in Toronto in 1963. Now it has 10 stores throughoutCanada

In 2005, Mr. Taft sold his shares to Mrs. Gardiner for $1M inaggregate (which was their FMV at the time)

In late January 2018, Mrs. Gardiner sold 600 of her GSC commonshares for $3,000 per share to Marcus Jones, an armâs length person(she still owns 400 common shares of GSC)

In January 2018, Mrs. Gardiner paid $3,500 to a charteredbusiness valuator to value her GSC shares and paid $2,500 in legalfees related to her sale of GSC shares

The FMV of GSC was determined to be $3M

Mrs. Gardiner incurred $300 of safety deposit box rental fees in2018 and she keeps her GSC share certificates in her safety depositbox

Assume GSC is not a qualified small business corporation

Marcus Jones is a non-resident of Canada

In 2018 GSC incurred the following expenditures:

Income taxes paid of $124,500

Salary and wages expense paid of $390,000

In addition, GSC accrued a bonus payable to Mrs. Gardiner of$70,000 for work performed in 2018. This bonus will not be paiduntil May 31, 2019

Interest expense paid of $5,000 on a bank loan used to financebusiness operations

Dividends paid to shareholders of $55,000

Warranty expense accrued of $25,000 (based on estimated warrantycosts). The actual cost in 2018 of servicing warranties was$20,000

Purchased new shelving units to display merchandise on April 1,2018 for $200,000

Purchased new computer software for $3,000 on January 1,2018

Purchased goodwill for $40,000 as part of a business acquisitionon January 1, 2018

Purchased a patent, with an 18-year legal life remaining onDecember 31, 2018 for $10,000

Accrued office supply expenses of $12,000, for suppliespurchased (and used) in late 2018. Payment of this account payablewas made in early 2019

Paid $7,000 for Toronto Blue Jays (baseball) tickets used totake large customers out to games

Incurred $4,000 of legal fees related to obtaining bankfinancing, and

Incurred lobbying expenses of $1,300 for matters related to thebusiness

Assume all expenditures are reasonable unless otherwiseindicated

Assume the prescribed interest rate is 1% at all times

Exhibit II

Mr. Rich

Mr. Richâs rental income is property income; i.e., he is notrunning a business

Mr. Rich wants to minimize his Canadian rental income and hedoes not have any other Canadian income

Mr. Rich has prepared the following (assume that all theexpenses below are paid in 2018 and are reasonable):

Mr. Richâs Canadian Rental Income

For the year-ended December 31, 2018

Gross rental revenue ($4,000 permonth) $24,000

Mortgage interest ($2,200 permonth) $13,200

Property taxes ($610 permonth) $3,660

Maintenance and repairs ($500 permonth) $3,000

Insurance ($200 permonth) $1,200

Total expenses $21,060

Netincome $2,940

coffeealpaca338

Your client Damien comes to see you in December 2016 asking toprepare his income tax return for the year ended 30 June 2016. Heis also seeking your taxation advice in relation to some otherissues. He provides the following information;

Damien inherited a single-storey house valued at $360,000 on 1December 1984 and lived in it as his main residence. On 1 September1989, Damien added a second storey of equal size to the house at acost of $190,000. He moved upstairs, since it had better views, andstarted to rent out the downstairs area to help pay off hismortgage.

Damien wants to sell the house and travel the world. He couldsell it now for $650,000, but he believes he could sell the housefor $720,000, provided he undertakes the following work to thehouse;

Replacing all the old floor coverings with tiles $4,800
Repainting the entire inside of the house $6,500
Building a carport as there is no car accommodation at present$10,400

Damien also received an insurance payout of $12,000 after amotorcycle accident coming home from work one day. He incurred$3,200 in medical costs and $3,000 in legal fees in relation to hisinjuries.

In addition to the above transactions, Damien had the followingincome and expenses for the year ended 30 June 2016;

Income

Salary (occupation â sales representative) $79,000

Entertainment allowance $2,000

Rental income from the house mentioned above $15,400

Franked dividends from Commonwealth Bank shares $2,106

Free flight received from Qantas Frequent Flyer Program$1,300

Expenditure

Meals incurred when entertaining clients in his job as a salesrepresentative for his employer $1,700

Purchase of work clothing and shoes $450

Costs of studying a management degree in order to obtain apromotion within The business he is employed $2,950

Train tickets for travelling to and from work $150

Rates and insurance on the house (this is the full amount)$2,400
Life insurance $180
Tax Agent fees $750
Damienâs PAYG Payment Summary shows PAYG withholdings for the year$18,800

REQUIRED:
Prepare a Letter of Advice to Damien thatoutlines/discusses/explains the following:

The tax implications of the expenditure on the house that hewants to undertake to improve the sale value.

The tax implications of the sale of the house,including anyexemptions available.Calculate the assessable gain, if any,assuming he does undertake the work to improve the sale value.

The tax implications of the insurance payout and medical costsincurred.Calculatethe assessable gain, if any.

The assessability and deductibility of all the other itemslisted in the information as you calculate Damienâs taxable incomefor the year ended 30 June 2016.

The taxpayable/(refundable) for Damien for the year ended 30June 2016, including all additional levies and tax offsets.

Important Note:

Damien is an astute taxpayer and questions every pieceof tax advice given to him. To ensure Damien is satisfied and youradvice will not be questioned in the future, you will need toprovide adequate (but concise) explanations about the income taxtreatment of all these items above.

As such, you will need to support all your discussionand interpretation with reference to legislation, cases or rulings.Referencing the Master Tax Guide will not be appropriate as this isnot the authority, but rather assists your understanding of thelegislation, cases and rulings. Also, copying entire sections oflegislation, cases or rulings will not be appropriate as Damienwants your advice provided in a way he can understand.

It may be necessary to make assumptions in the absenceof specific information that will be provided by Damien later, soyou may need to make a decision that moves in a particulardirection, but provide a brief explanation if another course ofaction is appropriate.

Your advice should be provided formally in aprofessional letter addressed directly to Damien (not an essayabout him), addressing each issue as necessary. Remember, quantitydoes not always equate to quality, so be concise in yourresponse.

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AFA 100 Lecture Notes - Lecture 4: Seneca College, Washing Machine, Costco

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