BMBA 140 Assignment #4iremcelen

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University of Victoria *

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140

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Accounting

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Feb 20, 2024

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BMBA 140 Financial Accounting – Assignment #4 (61 Marks) First and Last Name: İrem Celen Background: You are the accountant for Plants from Paradise Ltd. (Plants), a garden center located in Victoria, BC. Plants has a December 31 fiscal year end. The controller has given you a list of accounting tasks to complete:  Prepare the Property, Plant, and Equipment entries (Task #1)  Prepare a contingent liability analysis (Task #2)  Prepare a payroll entry (Task #3)  Prepare Financial Statements (Task #4)  Prepare a ratio analysis (Task #5) Task #1 – Prepare the Property, Plant, and Equipment Journal Entries (15 Marks): It is now December 31, 2022 - using the template provided, prepare the journal entries for the following PP&E transactions that took place during the year. Please show your calculations and round to the nearest dollar: 1. A new greenhouse was purchased on June 1, 2022 for $20,000 cash. The greenhouse is expected to have a useful life of 15 years and a salvage value of $2,500 at the end of its life. Plants considers the greenhouse a building for accounting purposes. Record the purchase and the annual depreciation. 2. A new tractor was purchased on November 1, 2022 for $12,500 cash. The tractor is expected to last 5 years and will be scrapped at the end of its useful life (no salvage value). Record the purchase and the annual depreciation. 3. On February 1, 2022, Plants sold their old tractor for $12,000 cash. At December 31, 2021, the Tractor had an original cost of $24,000 and Accumulated Depreciation of $9,000. The tractor is depreciated on a straight-line basis, at a rate of $3,000 per year. Record the disposal of the tractor. 4. Plants has existing equipment that is depreciated at a rate of $5,000 per year and existing buildings that are depreciated at a rate of $10,000 per year. Record the annual depreciation expense. Relevant Accounts: 1000 Cash 2010 Wages Payable 1010 Accounts Receivable 3000 Miranda Cornell, Equity 1015 Allowance for Doubtful Accounts 4000 Sales Revenue – Plants 1020 Interest Receivable 4010 Sales Revenue – Soil 1030 Inventory – Plants 4020 Sales Revenue – Delivery 1040 Inventory – Soil 4030 Gain on Sale 1050 PPE – Equipment 5000 Cost of Goods Sold 1055 Acc. Depreciation – Equipment 5010 Loss on Sale 1060 PPE – Building 5040 Bad Debt Expense 1065 Acc. Depreciation – Building 5050 Salaries Expense 2000 Accounts Payable 5060 Depreciation Expense

Journal Entry Template: Entry # Date Description Account # Account Name Dr / Cr Amount 1 June 1,2022 Greenhouse 1060 Building Dr 20,000 1000 Cash Cr 20,000 2 Dec 31,2022 Depreciation - Greenhouse 5060 Depreciation Expense Dr 681 1065 AD- Building Cr 681 3 Nov 1, 2022 New Tractor 1050 Equipment Dr 12,500 1000 Cash Cr 12,500 4 Dec 31,2022 Depreciation-Tractor 5060 Depreciation Expense Dr 417 1055 AD-Equipment Cr 417 5 Dec 31,2022 Depreciation –old tractor 5060 Depreciation Expense Dr 250 1055 AD-Equipment Cr 250 6 Dec 31,2022 Disposal of the tractor 1000 Cash Dr 12,000 1055 AD-Equipment Dr 9,250 5010 Loss Dr 2,750 1050 Equipment Cr 24,000 7 Dec 31, 2022 Annual Depreciation 5060 Depreciation Expense Dr 15,000 1065 AD-Building Cr 10,000 1055 AD-Equipment Cr 5,000 Calculations: Entry 2- (20,000-2,500)/15*7/12=681 Entry 4- 12,500/5*2/12=417 Entry 6 – 24,000-9,250=14,750 14,750-12,000=2,750 Loss 2

Task #2 – Contingent Liabilities (8 Marks) Please review the following note from the CEO and answer the questions provided: Note from CEO: I had a call with our lawyer and one of our customers is suing us. The customer claims that when they were visiting us, one of the farm cats allegedly bit her. We don’t even have farm cats, so I am a little confused as to what we need to do from an accounting perspective. The lawyer tried to explain that we may need a contingent liability, but he didn’t know much about the accounting side of things. He did say that normally cat bites go for around $25,000 if they require payment, however he thinks that it is unlikely that we will lose or have to pay any money. Questions: 1. What is a contingent liability? (2 Marks) It is a possible liability resulting from a past event. Whether a liability exists will be determined by a future event. 2. What are the accounting options for a contingent liability and when would you use each option? (4 Marks) Accounting Options 1) Record a liability (making a journal entry): if it is likely probable and reasonable estimate amount. 2) Disclose (note in Financial Statements): if it is likely but no reasonable estimate. 3) Do nothing: if it is unlikely 4) Disclose: if it is unlikely but substantial/material 3. What is your recommendation on how to account for this lawsuit? (2 Marks) Do nothing because it is not likely. 3

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Task #3 – Payroll (8 Marks) Based on the below payroll information, please prepare the payroll entry for this employee. Be sure to prepare an entry for both the employer’s portion and the employee’s portion. Note: Employees are paid bi-weekly. Please prepare the entry the bi-weekly pay period ending December 31, 2022. Employee ID #56 – Pay Stub Annual Salary $35,000 Pay periods per year 26 (Bi-Weekly) Federal Tax Rate 12% Provincial Tax Rate 5.06% CPP Rate 5.45% CPP Annual Exemption $3,500 EI Rate 1.58% Journal Entry Template Entry # Date Description Account Name Dr / Cr Amount 1 Dec 31,2022 Employee Payroll Salary Expense Dr 1,346.15 CPP Payable Cr 66.03 EI Payable Cr 21.27 Taxes Payable Cr 229.65 Cash Cr 1,029.17 2 Dec 31, 2022 Employer Portion Employee Benefit Expense Dr 95.81 CPP Payable Cr 66.03 EI Payable Cr 29.78 Calculations: Salary Expense= 35,000/26= 1,346.15 (Gross Pay) CPP= 1,346.15-(3500/26) * 5.45%=66.03 EI= 1,346.15 * 1.58%=21.27 Taxes= 1,346.15 (12%+5.06%)=229.65 4

Task #4 – Prepare Financial Statements (18 Marks) Using the below Adjusted Trial Balance, prepare the Balance Sheet, Statement of Owner’s Equity, and Income Statement. Plants From Paradise Adjusted Trial Balance December 31, 2022 Account Number Account Name Debit Balance Credit Balance 1000 Cash 12,200 1010 Accounts Receivable 18,859 1015 Allowance for Doubtful Accounts 500 1020 Interest Receivable 3,000 1030 Inventory - Plants 12,500 1040 Inventory – Soil 15,500 1050 PPE – Equipment 45,500 1055 Acc. Depreciation – Equipment 19,500 1060 PPE – Building 145,000 1065 Acc. Depreciation - Building 22,000 2000 Accounts Payable 19,576 2010 Salaries Payable 7,875 2020 Line of Credit 2,000 2025 Interest Payable 515 2030 Unearned Revenue 7,600 3000 Owner’s Capital 111,854 4000 Sales Revenue – Plants 167,894 4010 Sales Revenue – Soil 45,673 4020 Sales Revenue – Delivery 12,345 5000 Cost of Goods Sold 106,784 5000 Salaries Expense 29,154 5040 Bad Debt Expense 4,500 5050 Utilities 2,275 5060 Depreciation Expense 15,500 5060 Repairs Expense 3,700 5070 Interest Expense 2,860 Total $417,332 $417,332 5

Plants From Paradise Income Statement December 31, 2022 Revenues Plants 167,894 Soil 45,673 Delivery 12,345 Less: COGS 106,784 Gross Profit 119,128 Operating Expenses Salaries 29,154 Depreciation 15,500 Bad Debt 4,500 Repairs 3,700 Interest 2,860 Utilities 2,275 Total Operating Expenses 57,989 Profit 61,139 Plants From Paradise Statement of Owner’s Equity December 31, 2022 Opening Capital 111,854 Profit 61,139 Closing Capital 172,993 6

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Plants From Paradise Balance Sheet As at December 31, 2022 Assets Current Assets Cash 12,200 A/R 18,859 AFDA 500 Interest Receivable 3,000 Inventory 28,000 Total Current Assets 61,559 Property, Plant and Equipment Equipment 45,000 AD - Equipment 19,500 Building 145,000 AD – Building 22,000 Total PPE 149,000 Total Assets 210,559 Liabilities and Owner’s Equity Current Liabilities A/P 19,576 Salaries Payable 7,875 Line of Credit (LOC) 2,000 Interest Payable 515 Unearned Revenue 7,600 Total Current Liabilities 37,556 Equity 172,993 Total Liabilities and Owner’s Equity 210,559 7

Task #5 – Prepare Ratio Analysis (12 Marks) Using the prepared financial statements, please analyze the following ratios. Provide the formula for the ratio, calculate the ratio, and provide a brief description about what the ratio measures. 1. Working Capital Current Assets – Current Liability 61,559-37,556=24,003 It means an ability to pay short-term debt 2. Current Ratio Current Assets/Current Liabilities 61,559/37,556=1,639 It measures liquidity. How many $ of current assets per dollar of current liabilities. 3. Gross Profit Margin Gross Profit/Net Sales 119,128/106,784=1,11 It is an information about effectiveness of pricing and purchasing policies. 4. Return on Assets (Total assets at December 31, 2021 were $198,637) Profit/Average total assets 61,139/209,598=0,291 Return on Assets Average total assets= (220,559+198,637)/2=209,598 It means return on every dollar invested in assets. 8