3:57 PM Thu Jan 19 dsbn.elearningontario.ca E Accounts Payable $ 3.500 $ 3.000 Bank Loan 6.000 7.000 Total Liabilities 9.500 10.000 Equity 7.900 9.100 Total Liabilities 8. Equy $ 17.400 $ 19.100 Copyright CPA Ontario Teacher Colleague Program Cases ' CHARTERED PROFESSIONAL ACCOUNTANTS ONTARIO Muskoka's Original Ice Cream This business has been around for 45 years. There have been many owners over the years. The most current owner, Paul Shoemaker, owned and operated the business seven days a week. He hired one part-time employee to help with weekends and evenings. The store is located on a residential street that has only street parking. The store offers 35 avours of ice cream. All ice cream is purchased by the tub. The suppliermakes deliveries from Monday to Friday. There is a 24-hour turn-around for all deliveries. During Year 1, the business entered a five-year lease at $3000/year. The amounts shown in the financial information are for four months. The owner believes that sales dropped in Year 3 due to an unusually rainy summer. The refrigerator is over 20 years old. Paul has had some trouble with it over the past few summersbut was able to get it repaired by a close friend in exchange for some ice cream. This store used to be very popular but people got frustrated because they often ran out of the popular flavours. The business used to sell ice cream accessories such as decorative cups, ice cream scoopers, fridge magnets. etc. These products were not selling well so all the merchandise was donated to a local school for a fundraiser. The cost of the product was shown as a product write off in Year 2. Since it wasn't part of the normal operations of the business, it was shown on a separate line. Cynthia is very excited about this possible new venture. She's even convinced her younger brother and sister to work for free ice cream. if her dad buys either business. With their help, she wouldn't need other employees and would incur no wage expenses. "3' 37% [:1- 3:57 PM Thu Jan 19 O O O dsbn.elearningontario.ca H I CHARTERED A PROFESSIONAL ACCOUNTANTS ONTARIO Yogi Loves Yogurt The business began in Year 1 They offer 10 flavours of yogurt. Customers can choose from 8 different fruits and 2 basic flavours (vanilla and chocolate). They order vanilla frozen yogurt blocks and prepare the flavours based on the customer's request. The fruit is purchased frozen from another supplier. Often times when they run out of frozen fruit, fresh fruit is used. Fresh fruit is avoided due to the high cost. The business is owned by Yogi Yumyum. He is only involved in the administration of the business and hires employees to work in the store. This store is located on a very busy street in Muskoka. There is a public parking lot across the street. The rent is negotiated on an annual basis. The annual rent for Year 3, Year 2 and Year 1 was $3900, $3600 and $3000 respectively. The amounts shown in the financial information are for four months. They have one supplier for the yogurt product and frozen fruit. They have been able to reduce the cost overtime due to volume discounts. The depreciation is for a refrigerator that was purchased brand new in Year 1. The company sold an old computer during Year 3. Since it wasn't part of the normal operations of the business, it was shown on a separate line. MUSKOKA'S ORIGINAL ICE CREAM Income Information (unaudited) For the 4 month period ending August 31st Year 3 Year 2 Year 1 Sales $ 30,000 $ 33,000 $ 36,000 Expenses: Cost of product 13,000 15,000 18,000 Rent 1,000 1,000 1,000 Utilities (including phone, hydro) 500 400 300 Depreciation (refrigerator) 300 300 300 Wages 1,000 1,000 1,000 $ 15,800 $ 17,700 $ 20,600 Product write off - (3,000) Net Income 5 14,200 $ 12,300 $ 15,400 MU SKOKA'S ORIGINAL ICE CREAM Balance Sheet (unaudited) August 31st Assets Year 3 Year 2 Cash 31 3.000 $ 4.000 Supplies 400 600 Inventon' 5.000 4.500 Equipment [net amort) 9.000 10.000 Total Assets 5 17.400 5 19.100 Liabilities & Equity Accounts Payable $ 3.500 $ 3.000 Bank Loan 6.000 7.000 Total Liabilities 9.500 10.000 Equity 7.900 9.100 Total Liabilities & Equity $ 17.400 $ 19.100 Copyright CPA Ontario Teacher Colleague Program Cases "3' 37% [J- 3:57 PM Thu Jan 19 Part dsbn.elearningontario.ca E -: - CHARTERED - : v PROFESSIONAL ACCOUNTANTS ONTARIO -A nin f r h A (15%) Goodwill - During the purchase it was determined that $6,000 of the purchase price is considered goodwill. Cynthia is not exactly sure how to account for the goodwill in the nancial statements. Provide a detailed explanation of how the goodwill should be accounted for showing the first 2 transactions' Inventory Control - Cynthia's main inventory is ice cream. She is not exactly sure the best way to account for the ice cream inventory. She knows she can either use the periodic or the perpetual method but she is not sure which method is best for her business. Describe for Cynthia the difference between the two methods. Also let her know which method would be best for the ice cream business, and support your recommendation. Capitalization vs. Expense During one of the hottest Junes on record the ice cream freezer broke down. The repair person installed a new motor into the freezer at a cost of $2,000. The repair person said that the motor will extend the life of the freezer by 10 years. Cynthia would like to record this cost as an expense. Write a memo explaining the generally accepted accounting principle related to this situation. Discuss the alternative method for recording this transaction and why Cynthia should use this approach. '1? ('3' 37% E] 3:57 PM Thu Jan 19 . . . 37% AA dsbn.elearningontario.ca C + H MG adm + Copy of UTA.. Identity Digital Ice Cream Dr... X dsbn.elearni... 7A8 or -... CPA HARTERED 2 of 6 PROFESSIONAL ACCOUNTANTS ONTARIO ICE CREAM DREAMS Cynthia King is a Grade 12 high school student in Muskoka, Ontario. She has worked very hard in school this past year and was delighted in March to find out that she was accepted to the university of her choice. Cynthia wants to become a Chartered Professional Accountant (CPA) and eventually run her own business. Cynthia realizes the next four years will be expensive but she has a plan. There are two local ice-cream parlors for sale for the same amount. Both operate between May and late August. Trevor King, Cynthia's dad, is a CPA. He is proud of Cynthia's accomplishments and has performed a preliminary analysis of both companies. He concludes that he can purchase both companies and sell them in four years at approximately the same amount as the purchase price Cynthia estimates she will need a total of $15,000 each year for tuition, books, residence and other living costs. Her dad has agreed to purchase one of the businesses, providing she presents him with a solid business analysis. Cynthia has researched both companies and found out the following information: YOGI LOVES YOGURT Income Information (unaudited) For the 4 month period ending August 31st Year 3 Year 2 Year 1 Sales $ 30,000 $ 27,000 $ 21,000 Expenses: Cost of product 13,500 12, 150 9,450 Rent 1,300 1.200 1.000 Utilities (including phone, hydro) 1,000 900 800 Depreciation (refrigerator) 500 500 500 Wages 4,000 3,700 3,450 $ 20,300 $ 18,450 $ 15,200 Gain from computer sale 750 Net Income $ 10,450 $ 8,550 $ 5,800 YOGI LOVES YOGURT Balance Sheet (unaudited) August 31st Assets Year 3 Year 2 Cash 5,000 $ 4,500 Supplies 800 700 Inventory 4,000 4.500 Equipment (net amort.) 10,000 10,000 Total Assets 19,800 $ 19,700 Liabilities & Equity Accounts Payable 2,000 $ 2,500 Bank Loan 8.000 7.500 Total Liabilities 10,000 10,000 Equity 9.800 9.700 Total Liabilities & Equity $ 19,800 $ 19,700 Copyright CPA Ontario Teacher Colleague Program Cases