Question

In: Accounting

In order to complete your case analysis successfully, you should consider identifying the role you are...

In order to complete your case analysis successfully, you should consider

  • identifying the role you are playing,
  • assessing the financial reporting landscape considering the user needs, constraints, and business environment,
  • identifying the issues,
  • analyzing the issues (qualitatively and quantitatively), and
  • providing a recommendation for each issue identified in the case.

You are required to prepare for the case before the class and bring any documents that will support your analysis. An average grade will come from you answering questions with basic coverage and accuracy, showing all your preparation. Additional points come from including greater detail, astute and informed commentary where appropriate, and connections to readings and other content.

Respond in a single Word doc (or comparable text editor).

Henrietta’s Pine Bakery

Background

You are an Analyst for the professional service firm, FINACC LLP. Your firm specializes in providing a wide variety of internal business solutions for different clients. Given the outstanding feedback you received on your first engagement working for Big Spenders Inc., a Senior Manager in the Financial Advisory group requested your support on a compilation engagement.

Additional Information

Henrietta’s was established in 1963 when it first opened its doors in Dwight, Muskoka on highway 60. Over the past 50 years, there have been four owners and is currently owned by Carine & Geoff Harris who incorporated and took over the store on January 1, 2013. Their sons, Kyle and Nicholas have been an intricate part of the business from dishwashing to head bakers. Henrietta's has grown over the years with the addition of new items all the time, but the "Sticky Buns and Clouds" remain the most popular items amongst the 150 varieties of breads and pastries.

Henrietta’s runs out of 90 square meters (1,000 share feet) of space. It has one entrance into the bakery and doors leading out to highway 60. Henrietta’s pays $5,000 per month for the rental of the space. Carine and Geoff were able to negotiate with the landlord and were not required to pay the first month’s rent in advance. All of the rental payments are current and up to date. For the last two years, Henrietta’s has had a very reliable accountant prepare its year-end financial statements and everything has been correct. This year, Henrietta’s accountant retired and Geoff did the best he could recording his own financial information. For the information he was not sure about, he kept all of the required supporting documentation. Geoff hired your firm, FINACC LLP to prepare his financial statements for the year. Geoff supplied you with his unadjusted trial balance and the information in Exhibit I to assist you.

Supplementary Information

  • The amount currently sitting in prepaids arose due the insurance policy last year. Geoff didn’t know how to correct it, so he left it. This year’s insurance policy was purchased on November 1 for $9,000. The policy runs from November 1 to October 31 of each year.
  • Geoff has a note that he owed $900 in wages to his employees for the period ending December 31st.
  • The loan was incurred when the bakery was opened. The loan carried an interest rate of 8%. The interest is payable two months after year end and the principal is due in 2019.
  • Henrietta’s will sometimes book special events with small organizations that are allowed to pay after the event has taken place. On December 29th, a small company had a gathering at the bakery. The company was billed $1,089 and has 30 days to pay it. Geoff has not yet recorded this in his financial records.
  • Henrietta’s declared a dividend of $5,000 on December 30th.
  • Geoff didn’t know how to record amortization for the year and so left it for you to record. Amortization for all assets is charged using a straight-line method by taking the cost of the asset and dividing it by its expected useful life. The assets have expected useful lives as follows:

o    Computer: 5 years

o    Bakery equipment: 10 years

o    Furniture and fixtures: 20 years

  • The information shows that Henrietta’s owes $400 for a telephone bill and $400 for electricity for December. These amounts have not been recorded yet.

Exhibit I

Henrietta’s Pine Bakery

Unadjusted Trial Balance

December 31, 2015

Account Name

Debit

Credit

Cash

$35,000

Accounts Receivable

5,600

Food Inventory

21,000

Merchandise Inventory

62,500

Prepaids

3,400

Computers

30,000

Accumulated Amortization – Computers

12,000

Bakery Equipment

90,000

Accumulated Amortization – Bakery Equipment

18,000

Furniture and Fixtures

150,000

Accumulated Amortization – Furniture and Fixtures

15,000

Accounts Payable

18,000

Accrued Liabilities

-

Interest Payable

Dividend Payable

-

Long-term Loan

220,000

Common Shares

50,000

Retained Earnings

22,000

Food Revenue

468,500

Internet Revenue

127,000

Merchandise Revenue

103,000

Food Expense

240,000

Internet Expense

54,000

Electricity Expense

65,000

Telephone Expense

20,000

Interest Expense

0

Salary Expense

200,000

Insurance Expense

9,000

Supplies Expense

8,000

Depreciation Expense

-

Rent Expense

60,000

1,053,500

1,053,500

                                                                                                                                                             

Based on the information you have prepare the adjusting journal entries, an adjusting trial balance, the statement of earnings (income statement), statement of financial position (balance sheet), and statement of retained earnings. After you have completed the statements, prepare the closing journal entries and the posting closing trial balance. Ensure you show all of your work, and prepare proper journal entries and properly formatted financial statements.

Note to students: Issues are hidden within the case. It is your responsibility to read the case facts and identify the critical issues required for discussion and analysis.


Solutions

Expert Solution

Journal Entries
Date Description Debit Credit
1 Prepaid Insurance 4,100
To Insurance 4,100
2 Salary 900
To Accrued Liabilities 900
3 Interest Expense 17,600
To Interest Payable 17,600
4 Accounts Receivable 1,089
To Food Revenue 1,089
5 Dividend 5,000
To Dividend Payable 5,000
6 Depreciation 22,500
To Accumulated Amortization- Computer 6,000
To Accumulated Amortization- Bakery Equip. 9,000
To Accumulated Amortization- Furn & Fixt 7,500
7 Telephone Expense 400
Electricity Expense 400
To Accrued Liabilities 800
Adusted Trial Balance as on 31 Dec 2015
Account Name Debit Credit
Cash 35,000
Accounts Receivable 6,689
Food Inventory 21,000
Merchandise Inventory 62,500
Prepaids 7,500
Computers 30,000
Accumulated Amortization – Computers 18,000
Bakery Equipment 90,000
Accumulated Amortization – Bakery Equipment 27,000
Furniture and Fixtures 1,50,000
Accumulated Amortization – Furniture and Fixtures 22,500
Accounts Payable 18,000
Accrued Liabilities 1700
Interest Payable 17600
Dividend Payable 5000
Long-term Loan 2,20,000
Common Shares 50,000
Retained Earnings 22,000
Food Revenue 4,69,589
Internet Revenue 1,27,000
Merchandise Revenue 1,03,000
Food Expense 2,40,000
Internet Expense 54,000
Electricity Expense 65,400
Telephone Expense 20,400
Interest Expense 17600
Salary Expense 2,00,900
Insurance Expense 4,900
Supplies Expense 8,000
Depreciation Expense 22500
Dividend   5000
Rent Expense 60,000
Total 11,01,389 11,01,389
Income Statement for the year Ended 31 Dec 2015
Description Amount Amount
Revenue
Food Revenue 4,69,589
Internet Revenue 1,27,000
Merchandise Revenue 1,03,000 6,99,589
Less Operating Expenses
Food Expense 2,40,000
Internet Expense 54,000
Electricity Expense 65,400
Telephone Expense 20,400
Interest Expense 17600
Salary Expense 2,00,900
Insurance Expense 4,900
Supplies Expense 8,000
Depreciation Expense 22,500
Rent Expense 60,000 6,93,700
Net operating Income 5,889
Dividend   5,000
Net Income 889
Balance Sheet As on 31 Dec-2015
Description Amount Description Amount
Accounts Payable 18,000 Cash 35,000
Accrued Liabilities 1700 Accounts Receivable 6,689
Interest Payable 17600 Food Inventory 21,000
Dividend Payable 5000 Merchandise Inventory 62,500
Long-term Loan 2,20,000 Prepaids 7,500
Common Shares 50,000 Computers                                          30000
Retained Earnings 22,889 Less: Accumulated Depreciation     18000 12,000
Bakery Equipment                              90000
Less: Accumulated Depreciation     27000 63,000
Furniture and Fixtures                      150000
Less: Accumulated Depreciation     22500 1,27,500
3,35,189 3,35,189

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Statement of Retained earnings
Description Amount
Opening Balance 22,000
Add: Operating Income 5,889
27,889
Less: Dividend 5,000