Question

You set up your own business in merchandising sector in Scranton, PA - opening a luxury watch shop on 1/1/2020.

The following is related information about the business:

-   Specific sub-sector: Merchandising sector.

-   Location: Scranton, PA

-   Business model: merchandiser - buying and selling luxury watches.

-   Investment by owner: $1,000,000

- You hired a shop manager. In order to handle different aspects of business, you had one employee responsible for the purchasing, receiving, and storing of watches purchased. A second employee is responsible for the maintenance of account receivable records and collection from customers. A third employee has responsibility for personal records, timekeeping, preparation of payrolls, and distribution of payroll checks. As a part of his job, the shop manager would do some internal control functions. In addition, you hired one security officer, and 4 full-time sales assistants.

Requirements:

1. Based on information given above, identify at least 3 internal control weaknesses that the company has – be specific and explain why those are weaknesses. (review chapter 6) (10 points).

2. Set up an effective Internal Control System for your business using 5 different internal control elements. Be very specific with each element. At least 2 pages long- double spaced. (review pages 164- 168 – chapter 6 textbook). (50 points).

Note: answer to questions 1 and 2 using APA writing style.

3. Draw a document flowchart to depict that the luxury watches are shipped back to the supplier if they are found to be damaged upon arrival at the receiving warehouse of your company (review pages 368-371 – Chapter 12 textbook) (10 points)

4. You are given the following economic events of the business in 2020 (30 points):

1/1/2020: Opened the business, invested $1,000,000 cash in the business.

1/1/2020: bought a building for the business purpose for $100,000 cash. The building has a useful economic life of 10 years.

1/1/2020: purchased 100 luxury watches for $200,000 with $100,000 cash payment, the remaining amount payable on 2/1/2021. (each watch costs $2,000)

3/1/2020: purchased 50 luxury watches for $250,000 with cash. Each watch costs $5,000.

4/1/2020: purchased 40 luxury watches for $240,000 with cash. Each costs $6,000.

6/1/2020: Sold 130 watched for $1,300,000. Of which $300,000 cash was received at the time of sale. The remaining amount to be received on 5/2/2021.

7/1/2020: paid $1,200 in advance for 12 months’ property insurance (7/1/20 to 7/1/21).

8/1/2020: borrowed $500,000 from a local Chase bank. Interest rate is 12%/year. Interest is paid every 6 months- the first payment date is 2/1/2021. Principal would be paid on 8/1/2021.

9/1/2020: to expand business, you rent a showroom in the next building. Paid $24,000 cash in advance for 12 month’s rent.

12/31/2020: Paid 2020 utilities expense, advertising expense, and miscellaneous expense for $5000, $15,000, and $4,000, respectively.

Salary is paid on the last day of each month. Each month’s salary expense is $20,000.

Notes:

• On 12/31/2020: Physical inventory showed that there were 60 luxury watches on hand at the end of the period. The company used periodic inventory system, and used FIFO costing method.
• Your business used straight-line depreciation method for all fixed assets.
• Ignore tax.

Requirement: Prepare an excel file that includes

1. Tab 1 titled “accounting entries”: prepare all journal entries, adjusting entries, closing entries needed for the period ending on 12/31/2020 based on above economic events (12 points.)

2. Tab 2 titled “income statement”: prepare a multiple-step income statement for year ended 12/31/2020. (5 points)

3. Tab 3 titled “Statement of retained earning”: Prepare Statement of retained earnings for year ended 12/31/2020 (5 points)

4. Tab 4 titled “Balance sheet”: prepare a balance sheet as of 12/31/2020 (8 points)

Answer 1