(a) LISE ANDERSON, MD Bal Sept. 4 5 7 Accounts Sup- Cash +Receivable plies $3,000 +...

        

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(a) LISE ANDERSON, MD Bal Sept. 4 5 7 Accounts Sup- Cash +Receivable plies $3,000 + $1,500 + +800 $600 -800 +2,800 +7,700 -2,900 -800 12 15 -2,800 15 -1,900 15 -275 18 +700 20 -1,000 26 +3,000 29 30 $5.525 -700 +10.000 $12.800 + $600 PROBLEM 1-8A Equip- ment $7,500 = $3,000 Notes Accounts Anderson, Anderson, Payable Capital Payable $5,500+ $4,100 +2,300 +3,000 -2,900 +1,500 Drawings + Revenues -Expenses -$1,000 +$10,500 +325 +10,000 $9,800 = $6,000+ $4,425 + $4,100- $1,000+ $20,500 $28,725 - $28,725 -$2,800 -1,900 -275 -325 $5,300 Note that the September 28 transaction is not recorded, because the work will not commence until September. PROBLEM 1-8A (Continued) (b) Revenues LISE ANDERSON MD Income Statement Month Ended September 30, 2014 Service revenue..... Expenses Advertising expense Rent expense.......... Salaries expense Utilities expense. Total expenses.... Profit......... LISE ANDERSON MD Statement of Owner's Equity Month Ended September 30, 2014 L. Anderson, Capital, September 1........... Add: Profit......... ........... $20,500 $ 275 1,900 2,800 325 Less: Drawings .......... L. Anderson, Capital, September 30.. 5,300 $15,200 $4,100 15,200 19,300 1,000 $18,300 (b) (Continued) Cash.......... Accounts receivable. Supplies on hand. Equipment..... Total assets Liabilities LISE ANDERSON MD Balance Sheet September 30, 2014 Notes payable............ Accounts payable... Owner's Equity Liabilities and Owner's Equity Total liabilities.......... Assets $ 5,525 12,800 600 9,800 $28,725 ......... $ 6,000 4,425 10,425 L. Anderson, Capital Total liabilities and owner's equity................. $28,725 18,300 Taking It Further: When an item is purchased on account, payment usually must be made in 30 days. If a note payable is used, payment will be delayed until the maturity date of the note, which is typically longer than 30 days. Although this will likely mean that interest will also have to be paid, the cash remains in the business longer than if the item had been purchased on account. CONTINUING COOKIE CHRONICLE (a) Natalie has a choice between a sole proprietorship and a corporation. A partnership is not an option since she is the sole owner of the business. A proprietorship is the easiest to create and operate because there are no formal procedures involved in creating the proprietorship. However, if she operates the business as a proprietorship she will personally have unlimited liability for the debts of the business. Operating the business as a corporation could limit her liability to her investment in the business. Natalie will in all likelihood require the services of a lawyer to incorporate. Costs to incorporate as well as additional ongoing costs to administrate and operate the business as a corporation 1 could be more costly than a proprietorship. The corporation would pay income taxes on its profits, instead of Natalie personally paying taxes on the income of the proprietorship. The amount of taxes that would be paid could be higher with the corporation.¹ My recommendation is that Natalie choose the proprietorship form of business organization. This is a very small business where the cost of incorporating outweighs the benefits of incorporating at this point in time. Furthermore, it will be easier to stop operating the business if Natalie decides not to continue with it once she is finished college. Additional comments that are not specifically covered in the text that some students may identify or the instructor may wish to discuss with the students. CONTINUING COOKIE CHRONICLE (Continued) (b) Natalie will need information on her cash balance on a daily or weekly basis to help her determine if she can pay her bills. She will need to know the cost of her services so she can establish what to charge for her services. She will need to know the company's revenues and expenses so she can report her profit for personal income tax reporting purposes on an annual basis. If she borrows money, she will need financial statements so lenders can assess the company's ability to pay a interest and pay back a loan. Natalie would also find financial statements useful to better understand her business and identify any financial issues as early as possible. Monthly financial statements would be best because accounting information is needed on a timely basis. (c) If Natalie needs to borrow money from a relative or from the bank or needs to establish credit with some suppliers, she will need to be able to present these creditors with some financial information to obtain credit and to demonstrate her ability to repay loans, plus any interest. The Canada Revenue Agency (CRA) is another user of the financial information Natalie will present in reporting the profit of her business on her personal income tax return. CRA will want to make sure that Natalie is reporting all of the profits properly and that the expenses of the business are in fact deductible. CONTINUING COOKIE CHRONICLE (Continued) (d) Natalie will have a choice of adopting IFRS or Accounting Standards for Private Enterprises (ASPE) because Cookie Creations is a private company. Natalie will likely use ASPE as this set of standards will meet her company's needs. As a very small private company it will not need the extra disclosure that is required by IFRS. (e) Assets: Cash, Accounts Receivable, Supplies, Equipment Liabilities: Accounts Payable, Unearned Revenue, Notes Payable Owner's Equity: N. Koebel, Capital, N. Koebel, Drawings Revenue: Fees Earned Expenses: Advertising Expense, Interest Expense, Supplies Expense, Telephone Expense (f) Natalie should have a separate bank account used solely by Cookie Creations. This will make it easier to prepare financial statements for her business. The business is a separate entity from Natalie and must be accounted for separately. (a) LISE ANDERSON, MD Bal Sept. 4 5 7 Accounts Sup- Cash +Receivable plies $3,000 + $1,500 + +800 $600 -800 +2,800 +7,700 -2,900 -800 12 15 -2,800 15 -1,900 15 -275 18 +700 20 -1,000 26 +3,000 29 30 $5.525 -700 +10.000 $12.800 + $600 PROBLEM 1-8A Equip- ment $7,500 = $3,000 Notes Accounts Anderson, Anderson, Payable Capital Payable $5,500+ $4,100 +2,300 +3,000 -2,900 +1,500 Drawings + Revenues -Expenses -$1,000 +$10,500 +325 +10,000 $9,800 = $6,000+ $4,425 + $4,100- $1,000+ $20,500 $28,725 - $28,725 -$2,800 -1,900 -275 -325 $5,300 Note that the September 28 transaction is not recorded, because the work will not commence until September. PROBLEM 1-8A (Continued) (b) Revenues LISE ANDERSON MD Income Statement Month Ended September 30, 2014 Service revenue..... Expenses Advertising expense Rent expense.......... Salaries expense Utilities expense. Total expenses.... Profit......... LISE ANDERSON MD Statement of Owner's Equity Month Ended September 30, 2014 L. Anderson, Capital, September 1........... Add: Profit......... ........... $20,500 $ 275 1,900 2,800 325 Less: Drawings .......... L. Anderson, Capital, September 30.. 5,300 $15,200 $4,100 15,200 19,300 1,000 $18,300 (b) (Continued) Cash.......... Accounts receivable. Supplies on hand. Equipment..... Total assets Liabilities LISE ANDERSON MD Balance Sheet September 30, 2014 Notes payable............ Accounts payable... Owner's Equity Liabilities and Owner's Equity Total liabilities.......... Assets $ 5,525 12,800 600 9,800 $28,725 ......... $ 6,000 4,425 10,425 L. Anderson, Capital Total liabilities and owner's equity................. $28,725 18,300 Taking It Further: When an item is purchased on account, payment usually must be made in 30 days. If a note payable is used, payment will be delayed until the maturity date of the note, which is typically longer than 30 days. Although this will likely mean that interest will also have to be paid, the cash remains in the business longer than if the item had been purchased on account. CONTINUING COOKIE CHRONICLE (a) Natalie has a choice between a sole proprietorship and a corporation. A partnership is not an option since she is the sole owner of the business. A proprietorship is the easiest to create and operate because there are no formal procedures involved in creating the proprietorship. However, if she operates the business as a proprietorship she will personally have unlimited liability for the debts of the business. Operating the business as a corporation could limit her liability to her investment in the business. Natalie will in all likelihood require the services of a lawyer to incorporate. Costs to incorporate as well as additional ongoing costs to administrate and operate the business as a corporation 1 could be more costly than a proprietorship. The corporation would pay income taxes on its profits, instead of Natalie personally paying taxes on the income of the proprietorship. The amount of taxes that would be paid could be higher with the corporation.¹ My recommendation is that Natalie choose the proprietorship form of business organization. This is a very small business where the cost of incorporating outweighs the benefits of incorporating at this point in time. Furthermore, it will be easier to stop operating the business if Natalie decides not to continue with it once she is finished college. Additional comments that are not specifically covered in the text that some students may identify or the instructor may wish to discuss with the students. CONTINUING COOKIE CHRONICLE (Continued) (b) Natalie will need information on her cash balance on a daily or weekly basis to help her determine if she can pay her bills. She will need to know the cost of her services so she can establish what to charge for her services. She will need to know the company's revenues and expenses so she can report her profit for personal income tax reporting purposes on an annual basis. If she borrows money, she will need financial statements so lenders can assess the company's ability to pay a interest and pay back a loan. Natalie would also find financial statements useful to better understand her business and identify any financial issues as early as possible. Monthly financial statements would be best because accounting information is needed on a timely basis. (c) If Natalie needs to borrow money from a relative or from the bank or needs to establish credit with some suppliers, she will need to be able to present these creditors with some financial information to obtain credit and to demonstrate her ability to repay loans, plus any interest. The Canada Revenue Agency (CRA) is another user of the financial information Natalie will present in reporting the profit of her business on her personal income tax return. CRA will want to make sure that Natalie is reporting all of the profits properly and that the expenses of the business are in fact deductible. CONTINUING COOKIE CHRONICLE (Continued) (d) Natalie will have a choice of adopting IFRS or Accounting Standards for Private Enterprises (ASPE) because Cookie Creations is a private company. Natalie will likely use ASPE as this set of standards will meet her company's needs. As a very small private company it will not need the extra disclosure that is required by IFRS. (e) Assets: Cash, Accounts Receivable, Supplies, Equipment Liabilities: Accounts Payable, Unearned Revenue, Notes Payable Owner's Equity: N. Koebel, Capital, N. Koebel, Drawings Revenue: Fees Earned Expenses: Advertising Expense, Interest Expense, Supplies Expense, Telephone Expense (f) Natalie should have a separate bank account used solely by Cookie Creations. This will make it easier to prepare financial statements for her business. The business is a separate entity from Natalie and must be accounted for separately.

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