Genevieve Shannara has always wanted to open her own kennel and grooming services; she had been grooming pets for friends and family from her apartment for extra cash since high school. When the owner of a dog kennel in her neighborhood decided to retire, Genevieve jumped at the opportunity to take over the location of the kennel on December 1, 2021, using some of the birthday money she received from her parents. She has changed the name of the kennel to Purrfect Spa and Doggy Daycare and registered the business name listing herself as a sole proprietor. Genevieve wants to grow and expand her business but she needs some advice. She wants it to be a one-stop shop where local patrons can leave their pets for care, grooming, and relaxation. She is planning to expand operations to include the sale of premium pet foods, create a larger outdoor kennel run, and provide overnight/weekend stays for pets while their owners are out of town. 

Genevieve has a friend at RRC Polytech and they suggested that she receive some help from students taking the Financial Accounting course. She took the friend's advice and has asked a group of you to assist with her new business. 

 You and your group should ensure that your report is organized coherently and logically (see the rubric) for Genevieve as she is very busy operating Purrfect Spa and Doggy Daycare. 

Genevieve is curious to know if the month of December 2021 has been profitable since she is about to approach the bank for another loan to help finance her growing business. Genevieve remembers from high school accounting classes that in order to determine Purrfect Spa and Doggy Daycare's income, she must first make adjustments. Genevieve puts together the following information for you: 

1. One of Purrfect Spa and Doggy Daycare's customers is Geoff Zanetti. Geoff, a local lawyer, has three cats and two dogs that are groomed monthly and washed weekly. Once a month, an invoice is mailed to him at his office. At the end of December, Genevieve mailed an invoice for $400 to Geoff. She has not had time to record this invoice in her accounting records. 
2. The Spa had a promotion that ran from December 15 to the 22 for half-price grooming. Because there were so many existing and new clients to groom, Genevieve asked her friend to help her out and promised to pay her $18 an hour cash, with no statutory deductions. Her friend, Janelle, worked four hours each of those 8 days and was paid on January 1. 
3. $800 of pet food inventory for resale was purchased on December 27 for cash. Genevieve wasn't sure how to record this purchase so she debited the Supplies account and credited Cash. None of the pet food had been sold by December 31. Various other supplies valued at $300 remain at the end of December. 
4. Genevieve likes to pay all her bills on time but the utility bill came in late; the amount is $1289. She looked up in the old textbook what to do and thinks she has properly recorded the amount into Accounts payable and Utility expense. 
5. Genevieve estimates that all her equipment will have a remaining useful life of four years. (Assume Genevieve decides to record a full month's worth of depreciation using the straight-line method) 
6. Her Bank is charging 3.6% interest on the $6,000 bank loan Genevieve received on December 1 to assist with the startup of the business. The loan principal plus interest is to be repaid in 12 monthly installments starting the first of each month. 
7. Mid-December, Genevieve went to the bank and signed an agreement that gives the business overdraft protection on her bank account up to $15,000 with the stipulation that the business is showing a profit. 
8. In December, Purrfect Spa sold to various customers $900 of holiday gift cards for grooming services. $400 was redeemed before New Year's. 

Genevieve asks you to prepare the adjusting journal entries in exchange for a free spa day and grooming for your puppies. She also provides the December unadjusted trial balance for reference. She is confused why it doesn't balance. (Hint: Purrfect Spa and Doggy Daycare adjusts its accounts monthly). 

Purrfect Spa and Doggy Daycare
Unadjusted Trial Balance
December 31, 2021
	Debit	Credit
Cash	$7,450
Accounts receivable	100
Allowance for doubtful accounts		$3
Supplies	1,300
Equipment	12,960
Accounts payable		1,298
Unearned revenue		900
Bank loan payable		6,000
G. Shannara, capital		10,500
Service revenue		6,500
Advertising expense	125
Utilities Expense	1,289
Rent expense	1,500
Water expense	468
Total	$25,192	$25,201

 

Calculate December's net income/loss after adjustments. Show your calculations. 

Genevieve also wonders why adjusting journal entries are even necessary for Purrfect Spa and Doggy Daycare. She wonders why the financial statements can't just be produced from the unadjusted trial balance. 

Last, Genevieve is confused about if she can take a salary out of the company or not and how she should record amounts she draws out of the business. Right now, she is living off her personal savings. 

 It is now the first of February and Genevieve had a very busy January. Genevieve has journalized and posted January's transactions, the adjusting entries, and prepared the January 31 Trial Balance following your instructions and those she found on the internet. 

 On January 28, Genevieve initially recorded some additional equipment purchased on account for $1,500 as "supplies expense." After posting the original transaction, she then made an entry to correct this error. Had she not made a correcting entry, would the financial statements have been misstated? How? 

 In January, Geoff Zanetti called asking for a time extension on his $400 Accounts Receivable as he is out of province until Feb 26. Geoff likes to pay in person and was not able to come around in January to settle his account. Genevieve agreed and had his e-mail over a signed, two-month, 6% note. The extension starts January 1 and payment plus interest is due February 28. Genevieve needs your help in preparing the entry to record Geoff's extension. 

 Genevieve realized that she can't compete with the big pet stores when it comes to selling pet food so she has decided to not sell it anymore. The pet food supply purchased in December sold in January and no more were purchased. Inform Genevieve of what missing transaction remains based on a review of the January Trial Balance. Assuming perpetual inventory system is used. 

 

Purrfect Spa and Doggy Daycare
Adjusted Trial Balance
January 31, 2022
	Debit	Credit
Cash	$8,546
Accounts receivable	250
Allowance for doubtful accounts		$12
Note Receivable	400
Supplies	90
Merchandise Inventory	800
Equipment	14,460
Accumulated depreciation - Equipment		540
Accounts payable		2,237
Interest Payable		18
Unearned revenue		100
Bank loan payable		5,500
G. Shannara, capital		10,500
G. Shannara, drawings	2,000
Service revenue		15,500
Sales		1,100
Advertising expense	250
Depreciation expense	540
Interest Expense	35
Utilities Expense	1,500
Rent expense	3,000
Salaries expense	576
Supplies expense	1,980
Water expense	1,080
Total	$35,507	$35,507

Purrfect Spa and Doggy Daycare have had a very successful first couple of months. Genevieve has been thinking it may be profitable to sell some kind of locally handcrafted vegan treats suitable for both dogs and cats. She wants the treatment to be unique and healthy with simple ingredients and no preservatives, which means they only have a shelf life of 60 days. Genevieve has talked to the owner of a local bakery to see if they could make a tasty treat for pets. La Croissant was excited at the opportunity to create something new and agreed to be Purrfect Spa and Doggy Daycare's supplier of these unique and healthy treats. The baker figures that the cost of producing a 300-gram bag of treats will be approximately $3.30, which includes delivery to the store. These will be small batches and considered to be boutique. Genevieve will sell each bag of treats for $7.00. 

 Genevieve comes to you for advice on how to account for these healthy treats. She wants to have up-to-date inventory records at all times so she wants to use the perpetual inventory system like you would have assumed. She also wants to use the earnings approach for revenue recognition. Genevieve would like a description of the different cost formulas that she could use to account for the pet treats inventory. 

 Genevieve knows that the cost of the treats is expected to decrease with economies of scale once they become popular. Even though she will be selling the oldest treats first, there is likely a chance that some treats will need to be thrown away. 

 Genevieve asks you to provide a recommendation of the most appropriate cost formula she should use. She also asks that you provide her with an inventory record (she was personally leaning toward the FIFO method), for the February purchases and sales of treats, and the balance in the pet treats inventory account. Then, prepare the journal entries for the  February transactions, using your recommended method. 

 Due to the increase in business, Genevieve has hired Courtney Fragile part-time for reception, administration, and occasional pet washing duties. 

 The February 2022 transactions are on the next page. 

 The following transactions happen during the month of February 2022: 

 

Feb 3	Paid $990 for 300 bags of the pet treats, at $3.30 each received from La Croissant.
4	Paid $1,500 for the February rent.
8	Sold 80 bags of pet treats to various customers, for $560 cash.
11	Collected $150 of the accounts receivable from Jan 2022.
14	Paid for and received 200 bags of pet treats, at $3.25 each from La Croissant.
15	5 bags of pet treats, from the February 14 purchase, split open and got soaked during delivery from the baker. La Croissant issued Purrfect Spa and Doggy Daycare a credit note for the cost of the damaged product, to be used for future purchases.
15	Received a deposit of $1,625.00 from Prairie West Dog School for an order of 250 bags of pet treats to be delivered on March 15.
17	Paid the $612 water bill that was correctly recorded in January.
18	Recorded the past weeks' sale of 235 bags of treats, to various customers, for $1,645 cash.
22	Genevieve was concerned that there was not enough cash available to pay for all of the bills. She invested an additional $1,500 cash in Purrfect Spa and Doggy Daycare.
24	Sold 100 bags of pet treats on-line after being contacted by another local kennel where her friend Janelle works. They had heard great things about the quality of the treats and wanted to test them out at their place of business. Genevieve agreed to sell these on account for $600 (discounted for volume purchase), FOB destination, terms n/10. The treats were sold to Caring for Best Friends, another kennel service operating across town. Genevieve expects to receive their payment in early March.
24	Paid the $35 of delivery charges for the pet treats that were sold on-line to the local kennel on February 24.
25	Issued a cheque to Courtney Fragile for 50 hours worked in February at $16 an hour.
25	Paid $225 to Splendid Advertising ($125 for the January 2022 account payable and $100 for the February advertisement of the pet treats).
26	Purchased and received 280 bags of pet treats, at $3.20 each, totaling $896 on account from La Croissant, terms net 7 days. The owner of La Croissant has agreed to the extension of terms since Genevieve's business is now well established and orders are increasing.
28	Paid La Croissant the amounts due from the Feb 26 purchases less the credit note from Feb 15.
28	Recorded the past weeks' sale of 305 bags of treats, to various customers, for $2,135 cash.
28	Genevieve hasn't heard from Geoff Zanetti so the note was dishonored. At this time, it is expected that Geoff Zanetti will eventually pay the amount owed.

It is now November 30, 2022, which is Purrfect Spa and Doggy Daycare's year-end. Sales and service revenue have slowed down so Genevieve has had time to record all of the journal entries. She has also recorded all of the adjusting entries except for the year-end adjustment for bad debts. Uncollectible accounts are approximately 3% of outstanding accounts receivable for the industry. Using this industry average, prepare the year-end adjusting entry. 

Genevieve asks you to prepare closing entries and a post-closing trial balance, after you have completed the year-end adjustment for bad debts. 

 

Purrfect Spa and Doggy Daycare
Adjusted Trial Balance
November 30, 2022
	Debit	Credit
Cash	$31,203
Accounts receivable	852
Allowance for doubtful accounts		$12
Supplies	275
Merchandise inventory	4,500
Equipment	14,460
Accumulated depreciation - Equipment		3,553
Accounts payable		950
Salaries payable		400
Unearned revenue		250
G. Shannara, capital		12,000
G. Shannara, drawings	9,000
Service revenue		78,000
Sales		58,500
Cost of goods sold	41,175
Interest revenue		4
Advertising expense	950
Depreciation expense	3,553
Freight out	245
Interest Expense	60
Rent expense	18,000
Salaries expense	8,400
Utilities expense	9,600
Supplies expense	4,780
Water expense	6,616
Total	$153,669	$153,669

In reviewing her accounts receivables on January 17, Genevieve is sadly reminded of the outstanding balance of $404 from Geoff Zanetti. Geoff Zanetti is the local lawyer that she knows whose company came into some financial difficulties in December 2022 so she decides to write off the account rather than pursuing collection. 

 Unexpectedly, on February 20, Geoff Zanetti pays the original $400 owed. Genevieve asks you to help with the journal entries related to the above transactions. 

Genevieve has been thinking of buying an automatic pet treat press and dehydrator for the business since La Croissant is having difficulty in keeping up with her demands for products. La Croissant would continue to provide the basic pre-mixed ingredients on a weekly basis in 5- gallon pails. All Genevieve would need to do is feed the dough into the machine and it will form the treats by pressing into a mold and then placing the product into a dehydrator. This can be run overnight so that in the morning, the shop would be filled with the delicious smell of pumpkin and peanut butter. She estimates that she can buy the equipment from a US supplier, FOB destination, for $59,500 CAD. Genevieve would spend an additional $6,000 to have the equipment installed. There is some duty on the unit if purchased from the only supplier found in the USA, about 3% of the purchase price. 

 The press and dehydrator will need to be run for 13 small test batches to make sure that the product is up to standards, before any customers can purchase the final product. The cost of each test will be $50 for ingredients and for contracting the baker from La Croissant to work out the correct temperature settings and length of time to get the moisture content correct. 

 The new press and dehydrator is expected to last about ten years and to complete 2,400 batches of treats. The annual cost to maintain the press and dehydrator will be approximately $12,000. Genevieve estimates that, at the end of the ten-year useful life, this equipment will sell for 10% of the original purchase price. 

 It is Genevieve's opinion that she can have the press and dehydrator installed and fully tested by the end of July 2023, making it available for August 1 full production. The following production is planned: 160 batches in 2023, 260 batches in 2024, 225 batches in each of the years from 2025 to 2032, and 180 batches in 2033. 

 Genevieve is wondering what effect the press and dehydrator's cost, and related depreciation, will have on the statement of income and statement of financial position. She asks you to determine the cost of the press and dehydrator and help her select the appropriate depreciation method. Genevieve has been reading online about depreciation and notices that there are three alternative depreciation methods (straight-line, units-of-production, double-diminishing balance). She wants each year of depreciation to be as accurate as possible so she likes the sound of the nearest month method for any partial years. She asks you to prepare the depreciation schedules for all three methods of depreciation. Does she wonder which method of depreciation would result in the highest profit for the year ending November 30, 2023, and over the life of the asset? Genevieve asks you to prepare the annual depreciation journal entries for the first two years under the method that results in the highest profit for fiscal 2023.

Answer rating: 100% (QA)

When the depreciation charge for the declining stability technique is about as a more than one doubl... View the full answer