Question: Wilfred Fong is the owner and operator of Appliance
Wilfred Fong is the owner and operator of Appliance Town Ltd. (ATL), Denzil's largest independent household appliance store. ATL supplies appliances to retail customers as well as to builders of the many new homes and apartments that are going up in the community. Sales to builders have grown substantially in the last year. ATL has been in business for five years and Wilfred has been happy with its performance.
ATL's balance sheet for August 31, 2016, the company's year-end, is shown below.
Wilfred uses the financial statements mainly for tax purposes and to show the holders of the long-term notes.
It is now mid-September 2017. ATL needs to prepare its financial statements for the year ended August 31, 2017. The following information has been obtained about the fiscal year just ended:
i. ATL purchased appliances from suppliers for $1,700,000. All purchases were made on credit.
ii. Sales during the year were $2,700,000. Cash sales were $1,550,000. The remainder was on credit, mainly to builders.
iii. The cost of the appliances sold during fiscal 2017 was $1,490,000.
iv. ATL paid salaries and commissions to employees of $400,000. On August 31, 2017, employees were owed $15,000 by ATL.
v. ATL collected $750,000 during the year from customers who purchased on credit.
vi. ATL paid suppliers $1,200,000 for appliances it purchased on credit.
vii. During the year, ATL paid the taxes it owed at the end of fiscal 2016. During fiscal 2017, ATL paid $30,000 in instalments on its 2017 taxes. At year-end, it's estimated that ATL owes an additional $24,000 in taxes.
viii. ATL accepted $20,000 in deposits from customers who wanted a guarantee that their appliances would be delivered when they needed them. The deposits pertained to a particularly hard-to-get appliance. ATL expects the appliances will be delivered in early November 2017.
ix. Beginning July 1, 2017, ATL pays $8,000 a month for the rent of its store. The terms of the lease require that rent be paid six months in advance on January 1 and July 1 of each year. Before July 1, 2017, ATL paid $7,000 a month in rent. In addition, the new lease requires that ATL must pay 2 percent of annual sales to the property owner 60 days after the year-end (this wasn't required under the old lease).
x. Wilfred recently redecorated his kitchen at home. He took a refrigerator, stove, and microwave that cost $9,000 from the store and installed them in his new kitchen.
xi. During 2017, ATL purchased new capital assets (furniture and fixtures) for $50,000 cash.
xii. Depreciation expense for 2017 is $44,000.
xiii. During the year, ATL paid $17,000 in interest to the holders of the long-term notes. Interest is paid annually on September 1. In addition to the interest payment, ATL paid $40,000 on September 1, 2016 to reduce the balance owed on the long-term notes. The interest rate on the notes is 8.5 percent.
xiv. ATL paid $450,000 in cash for other expenses related to operating the business in fiscal 2017.
a. Enter each transaction onto an accounting equation spreadsheet. Create a separate column on the spreadsheet for each account. Make sure you prepare all adjusting entries and the closing entry to the spreadsheet. Indicate whether each entry to the spreadsheet is a transactional entry, an adjusting entry or a closing entry.
b. Provide explanations for each of your entries. You should explain why you have treated the economic events as you have (that is, why you have recorded an asset, liability, etc.).
c. Prepare a balance sheet, an income statement, and a statement of retained earnings from your spreadsheet.
d. Wilfred is considering expanding ATL to include a wider range of products. Wilfred has approached you about purchasing common shares of ATL to help finance the expansion. Based on your examination of the financial statements, what can you tell about ATL that would be useful to your decision to invest? Also, list five questions you might ask Wilfred that would help you use the financial statements moreeffectively.
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