BuAD 121

Financial Accounting II

Memo Case Assignment - Fall 2023

Quinn's Fishing Charters

Quinn's Fishing Charters (QFC) is a small, private business located in Kelowna, BC.QFC provides fishing charter trips on Lake Okanagan ranging in length from four to eight hours per trip. Due to the resurgence of the rainbow trout population in the region, the demand for fishing charters in the Central Okanagan has grown rapidly in the past few years. QFC caters to all skill levels of fishers, from inexperienced newcomers to hard-core trophy seekers.

Quinn Walters, the owner of QFC, is looking to expand his business in order to capitalize on the growth in the industry. He has observed several of his competitors grow from a single fishing boat to as many as four boats or more! In response to this growing market, Quinn is purchasing a new boat to add to his current fleet of two. In order to finance this purchase, Quinn is considering different financing options (see below) and is looking for advice on how to proceed.

Required

Quinn has asked you, his lifelong friend and accountant, for a report analyzing the three financing options. He would like your analysis to include both quantitative and qualitative factors leading to a recommendation on what financing option to choose. Quinn does not like taking on too much risk and he wants to minimize cash payments, particularly in the first three years, in order to grow his business.

For the purposes of this report, assume the boat purchase takes place on January 1^st of the current year and that QFC has a December 31 year-end.

Financing Options

Quinn is purchasing the boat from Yacht World in Toronto, ON. (FOB shipping point).The cost of the boat is $510,000 plus $10,000 in shipping charges to transport it from Toronto to Kelowna (for simplicity, ignore any PST and GST). The boat is expected to have useful life of 10 years with a salvage value of $40,000 at that time. All boats are depreciated on a straight-line basis.

Quinn would first like to know what the journal entry would be for the initial purchase of the boat, assuming financing has been arranged (ie. assume Quinn has the cash available to purchase the boat regardless of the financing he chooses). Assume shipping charges are paid using cash by the party responsible. Quinn would also like to know what the depreciation journal entry will be at the end of the first year.

Financing Option #1 - Long-Term Loan

A five-year loan from the Okanagan Credit Union for $510,000. The interest rate on the loan will be 7% with annual payments each December 31^st consisting of an equal amount of principal (ie. $102,000 each year) plus applicable interest expense.

Quinn would like to know what the journal entry is for the initial receipt of the loan as well as the first payment on December 31^st of the current year.

Financing Option #2 - Bond Issue

QFC will issue bonds on January 1^st of the current year with a face value of $510,000, a coupon rate of 7% with interest paid semi-annually (July 1 and January 1) and a maturity of 10 years. Bonds with a similar risk profile currently have a yield of 8% (ie. the market rate of interest).

Quinn would like to know what the journal entry is for the issue of the bonds as well as the journal entries for the first interest payment and the first year-end adjusting entry. If this option is chosen, QFC will use the effective interest rate method for accounting for the bonds.

Financing Option #3 - Preferred Shares

QFC will issue 15,000 non-cumulative, convertible, preferred shares at $34.00 per share to friends and family. Each share will have a dividend right of $0.80 per share and is convertible into one common share after five years have passed (ie. not convertible until five years from the date of issue). Prior to this financing, QFC's share capital consisted of:

Quinn and his family 55,000 common shares

Maverick Walters (Quinn's brother) 1,800 cumulative preferred shares, $0.60 dividend right

All the current shares were issued when the company was formed five years. No dividends were paid for the prior two years, but were paid in full each year before that. Quinn is expecting QFC to declare a $20,000 dividend on December 1^st of the current year to be paid January 15^th next year.

For this financing option, Quinn would like to know the following:

1. The journal entry for the issuance of the shares.
2. A calculation to determine how much of the declared dividend will go to the preferred and common shareholders, assuming the dividend does get declared.
3. All journal entries related to the dividend that would occur in the current year only, assuming the dividend does get declared. QFC uses separate 'dividends declared' accounts for each type of share (common, preferred), but uses only one 'dividend payable' account. Be sure to do the journal entry on December 31^st to close out the 'dividends declared' account.

Report Format

Your report should be written as a professional memo structured as follows:

1. Identification of your role and the key objectives as identified by the person requesting the memo.

1. Analysis of the purchase of the new boat.
   1. Journal entry for the initial purchase of the boat on January 1^st
   2. Journal entry to record the first year of depreciation of the boat.

1. Analysis of each of the financing alternatives.
   1. Long-term loan
      1. Pros, cons (min of two each)
      2. Journal entry for receipt of the loan on January 1^st
      3. Journal entry for December 31^st
   2. Issue bonds
      1. Pros, cons (min of two each)
      2. Journal entry for the issue of the bonds on January 1^st
      3. Journal entries for the first two interest payments
   3. Issue preferred shares
      1. Pros, cons (min of two each)
      2. Details of the calculations of the dividends for each type of share class (in table format).
      3. The journal entry for the issuance of the shares on January 1^st, and the journal entries related to the dividends on December 1^st and December 31^st, assuming the dividend is declared.

1. Conclusion - Provide a recommendation on which financing option Quinn should choose based on your analysis and his key objectives for the business.

Additional Requirements:

1. Be sure to include any calculations used to determine the journal entries (ie. show your work).
2. Your memo should be formatted as a professional memo with a proper header (To, From, Date, Subject). There are many professional memo templates available in Word or online to choose from.It is your choice.
3. Your memo is not to exceed three pages, including journal entries and calculations. Anything beyond three pages will not be reviewed/marked.
4. Written text is to be single-space, Arial font, 12-point.
5. Margins on each page to be one inch (1") all around.

Due Date - This assignment is due on Friday, December 1^st at 11:55 pm via the appropriate Moodle dropbox in the 'Memo Project' folder.

See the marking rubric on the following page.

BuAD 121

Financial Accounting II

Memo Assignment - Marking Rubric

Required	Mark Available	Mark Awarded	Comments
Identification of role, key objectives	5
Analysis of initial purchase transaction	5
Analysis of financing alternatives
Long-term debt	8
Bonds	12
Preferred shares	10
Conclusion	5
Professionalism and presentation	5
Total	50