Handel's Toy Shoppe is a small private corporation that uses ASPE. Tony is the store's operating manager and its primary shareholder. He owns 70% of the 20,000 shares that the store is authorized to issue. Another 15% are held by various other interested parties. Shares do not trade hands very often, however, there was one issuance of shares in June 2020 at $100 per share. This is part of the 15% that have been issued to other individuals. 

Handel's is well known in southwestern Ontario as 'the place' for grandparents to shop for perfect gifts for their grandchildren. You are a financial accountant with the Big-5 accounting firm Better and Best. It is currently February 2021, and you are assisting Tony with the financial statements for the year ended February 28, 2021. These statements will be published on April 30, 2021. 

Tony is very excited to tell you that Handel's Toy Shoppe is Throughout the pandemic, the store has been meeting the needs of many families and the toy business has never been busier. Sales of puzzles have been particularly strong, as well as all types of educational workbooks and science kits. Now Tony is going to purchase a small warehouse for inventory storage so that he can free up more floor space for shopping in the current location. 

The appraised value of the warehouse is $250,000 and Tony is considering two options to finance the purchase. The seller has indicated that she is indifferent between the choices. She will accept whichever option Tony prefers. Tony is concerned about the impact of the warehouse acquisition on the current ratio because his bank watches this closely as a condition for his operating line of credit. 

Option 1: The seller will accept 2,000 of Handel's shares plus $100,000 cash in the exchange. For this option, Tony has proposed the following journal entry. If this option is used, the sale would close on February 28, 2021. Tony likes this option because he believes it will have a positive impact on the year-end current ratio by adding the warehouse as an asset adding no new debt. 

DR Warehouse 300,000

  CR Cash  100,000 

  CR Common Shares  200,000 

Option 2: Handel's currently has an outstanding bank loan of $200,000 that is due on March 31, 2021. Although the business has the cash to pay in full on the due date, Tony is confident that the bank would allow him to refinance the loan for another two years at the current market rate of 6%. He could then use the money that he would have paid to the bank, along with other cash that is in the business bank account, to purchase the warehouse. With this option, the sale would close on March 31, 2021. Tony is concerned because he believes this keeps the current loan on the financial statements at year-end without adding any assets. For this alternative, Tony is unsure how to perform a journal entry for the purchase of the warehouse and has asked for your help with it. He has also asked which of the two options you think would be best for purchasing the warehouse. 

There is one other thing that Tony has asked for your help with. He has just received a call from a Canada Revenue Agency auditor that plans to audit Handel's HST remittances for March 1, 2020, through February 28, 2021. The audit will start in April 2021 and is expected to take three months to complete. For this audit, Tony will need to provide detailed records related to all the store's inventory purchases and sales. While he is quite confident that everything will be fine, he is nervous that an unintended mistake could have been made that he is unaware of in recording HST collected on sales. He would like your advice on whether he should record a journal entry with a debit to 'Possible HST Audit Issues' and a credit to 'HST Audit Liability'. 

Required: For each accounting issue in the case: 

1. Clearly identify the issue.
2. Provide a brief written analysis of the issue. Use ASPE to analyse and list them.
3. Provide the proper journal entry or entries for each issue. If no entries required, determine whether a disclosure note is required. If no entries and no disclosures are required, clearly explain why they are not.
4. Address any specific concerns that Tony has, providing professional advice and responding to any issue(s) he has raised. Among other things, this must include a specific recommendation for how to finance the warehouse.

Answer rating: 100% (QA)

Issue 1 Financing the Warehouse Acquisition Option 1 Analysis Option 1 involves issuing 2000 shares of Handels Toy Shoppe plus 100000 in cash in excha... View the full answer