Question

Algonquin Outfitters

Background

You are an Analyst for the professional service firm, BUSI 1043 LLP. Your firm specializes in providing a wide variety of internal business solutions for different clients. Since you enjoyed your time in Muskoka compiling the Financial Statements for Henrietta’s Pine Bakery, the Senior Manager from your previous engagement gave you another northern Ontario client, Algonquin Outfitters.

Additional Information

Algonquin Outfitters follows the Accounting Standards for Private Enterprises. Despite its revenues, AO operates with few administrative staff, currently employing 12 individuals in addition to the owner, who is there every day.

The owner is considering expanding his operations into the Haliburton Highlands. In order to do so he will have to look into financing options. He is contemplating two debt options: traditional bank financing, or bonds. He is also considering selling some of his common shares to five of his friends and relatives. He is unsure of how these options would impact him and the current organization of his company.

In December of this year, one of AO’s trucks carrying bike and ski lubrication was in an accident. The substance spilled into a local river, contaminating the water supply. AO’s layers have stated that the local residents have filed a lawsuit for $2 million. They expect that AO will be found guilty but the settlement will be between $1.0 million and $1.8 million. AO has let its insurance policy expire and therefore does not have any coverage.

On December 31, four of AO’s trucks were loaded with customer freight and sitting at AO’s loading docks. The goods were delivered to the customers on January 5^th and 6^th respectively. The revenue of $80,000 was recorded in the books on December 31^st.

The owner knows about the importance of internal controls but believes he needs a refresher. He had an individual from purchasing leave earlier this year and is now using the accounts payable person who also prepares the cheques to take care of all purchases. He is beginning to think that this is a good idea as it would save one salary. On the other hand, he does want to maintain controls and is interested in eliminating all potential problems. He would like your recommendations about how he should deal with this.

AO purchased equipment on January 1 five years ago for $80,000 and estimated an $8,000 salvage value at the end of the equipment’s 10-year useful life. On March 31^st of this year, the equipment was sold for $21,000. The last entry to record depreciation was at December 21^st of the prior year. No entries for the sale have been made yet.

The year end for AO is December 31^st. It is now April 20^th and you have been asked to provide a memo to your Senior Manager that can be used as the basis for discussion with the owner that addresses the issues that concern you and the owner. You must address all of the issues in depth and provide recommendations on how to account for them.

Required

Prepare the memo

Answer 1