Today is November 1, 2020. You, CPA, have just been hired by Custom Auto Parts (CAP) as an accountant to provide financial expertise during its current expansion. CAP was founded in 1995 by Jerome Blackman (sole shareholder), and CAP has remained a private corporation ever since. From its humble beginnings, CAP has grown substantially. CAP’s operations focus on the production of both standard and unique car parts. CAP always strives to use modern technology to produce quality car parts. When CAP commenced, it produced car parts for Canadian automotive companies that were seeking to outsource their production. Soon after, as word spread on the quality of its parts, CAP’s products were being sought after by companies outside of Canada. In addition, CAP began selling its products to individuals who were looking for unique car parts to restore older cars. As a car buff, you are very excited about the position as it allows you to apply your accounting knowledge in an industry that interests you. On your first day, you met with CAP’s CFO, Robert Ryder. Robert begins by explaining how excited he is that you have joined CAP’s team and he looks forward to the expertise that you will bring to CAP’s accounting department. Robert continues by explaining that as CAP has grown, so has its dependency on external financing. Just this year, CAP had purchased additional equipment to handle its recent growth. CAP has had a long-standing relationship with its bank. However, given the recent credit crisis, the bank has changed its policies on all loans.

 Robert has provided you with a copy of CAP’s statement of financial position (see Exhibit I) as at October 31, 2020, which is CAP’s fiscal year-end date.Exhibit I

 CAP’s Financial Position Custom Auto Parts 

Statement of Financial Position

 as at October 31

 Assets 

Current assets                                              2020         2019  

Cash                                                          $35,000       $20,000  

Accounts receivable                                  13,000         10,000  

Inventory                                                     20,000          12,000  

Prepaids                                                3,000    3,000 

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Total current assets                                    71,000       45,000  

Property, plant, and equipment (net)  2,800,000  2,200,000 

Total assets                                                 2,871,000    2,245,000

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 Liabilities Current liabilities  

Accounts payable                                            25,000       20,000 

Notes payable                                                  13,000       25,000 

Current portion of long-term debt        150,000    50,000 

                                     

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                                                                             188,000    95,000  

Long-term debt                                            1,800,000   1,450,000 

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Total liabilities                                                 1,988,000 1,545,000 

Shareholders’ equity  

Share capita                                                                100                100  

Preferred shares                                                 100,000        100,000  

Retained earnings                                         782,900   599,900 

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Total equity                                                       883,000    700,000 

Total liabilities and shareholders’ equity     $2,871,000 $2,245,000     

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Debt to equity 2.67 2.21 

After the meeting, Robert asks you to analyze the new accounting issues surrounding CAP and to provide recommendations on their resolution. He concludes by reminding you that the bank is eager to see the year-end financial statements. As you make your way back to your desk, you begin by reviewing a file outlining important transactions undertaken by CAP. You note the following issues:

On November 1, 2019, an additional $500,000 of long-term loan was taken out to help finance the purchase of certain manufacturing equipment for $600,000. (Note: the additional $100,000 was paid for with cash.) Given this new loan and CAP’s revised debt load, CAP must now maintain a maximum debt to equity ratio of 3:1 and its financial statements must comply with ASPE. If CAP breaches the covenant, the bank has the ability to call for the loan in full. 

The manufacturing equipment that was purchased during the year will be depreciated over 10 years. It is classified as class 39 and has a CCA rate of 25%. CAP is taxed at the highest possible rate of 45%, and the half-year rule applies. Robert explained that CAP has not taken any consideration for potential tax consequences on the equipment purchase. (Note: for simplicity, assume that all other future tax considerations have been properly addressed.) After reviewing this information, you realize that you have much to contemplate as to how these issues should be dealt with. 

Required 

Provide a report to Robert outlining your recommendation on the accounting issues and note other important issues.

Answer rating: 100% (QA)

Custom Auto Parts Report on the Accounting issues and significant proposals The accomplishment of any association relies upon different elements like ... View the full answer