· Complete the case in a professional business format in Microsoft Word.
· Upload the assignment to the Case #2 Dropbox in Brightspace by the deadline.
· Include your name(s) on the first page of your memo.
· Students working as a group of two MUST:
· Submit the case in one or both member’s the Brightspace dropbox clearly indicating both group members names. (Ensure you submit the same version as the first case I encounter will be marked with mark for both group members.)
· Each student must complete the “Case#2 Group Evaluation” and submit in their own dropbox.
· Your paper is marked based on what is submitted in Brightspace by the deadline.
Your memo must include the following:
Introduction (one paragraph)
First, consider any high-level items that you will refer to in more than one issue. For example, which GAAP you are using and why.
Accounting Issues
Main Issues (approximately one page each)
Each item from Exhibit I is required to be discussed as a minimum.
Discuss each accounting issue fully before proceeding to the next.
You should start with the most important issues first (ie. rank your issues).
Each issue should have a heading and include the following sub-headings:
Issue: Include one sentence to very
iefly summarize the situation.
Indicate the FINANCIAL ACCOUNTING issue relating the 2020 financial statements (the problem you will solve).
State the financial statement and other implications of the issue.
Analysis: Analysis must reference the CPA Handbook and include one direct quote. You may also use the conceptual framework/financial statement concepts provided in the Handbook. (Use in-text citations, ie. As per ____, “ …”. You may also reference your textbook but one CPA Handbook quote as a minimum must be used per issue.)
You must apply the case facts to the Handbook. Consider all sides if appropriate. You may need to make assumptions – state them.
Recommendation: State your recommendation relating to the 2020 financial statements. (This is your solution to your problem identified in the issue section.) Very
iefly summarize your rationale (this should tie back to your analysis.) Any significant calculations supporting your recommendations or analysis should be provided in an appendix to your report (indicate final amount in paper and reference to appendix for support). State any implications of your recommendation.
Other Issues (one paragraph)
As Director of Finance, consider at least one other potential financial accounting issue that you noted from the case (and you might not have enough information to analyze fully). What might you want to investigate further? Include what information you would need and why.
Overall Conclusion (one to two paragraphs)
In conclusion, consider any overarching issues or “bigger picture items”. Are there any the overall implications of your recommendations to the Company?
FURTHER GUIDANCE FOR YOUR REPORT:
Refer to the case analysis tips and guidance given in the Case video and resources on Brightspace.
The expectation is demonstrating your knowledge from ACCT 3351 topics. You may however need to use general financial accounting knowledge to date. You are not required to do any research outside the Handbook and your textbooks for this course but you are expected to use your
ain!
· You may want to start with your textbook in approaching each issue and developing your preliminary analysis.
· In many cases, the relevant standards are referenced in the textbook. You can then go to the relevant standard for fuller support of your analysis.
· Document your logic, professional judgement and assumptions. All the information is not provided intentionally so you need to work with what you have.
Case #2: Smart Career College
Smart Career College (Smart) is a career college located in Halifax, Nova Scotia. Smart is a privately owned company set up in 2016 when Jessie Weeks purchased the assets of the college from a retiring owner. Jessie owns 70% of the company and her sister, Frances, owns 30%.
Smart has about 100 students per year and provides three programs: Hair Styling, Esthetics, and Make-up. Programs last approximately 10 months (September to June) and tuition averages $11,000 (including all books, materials, and supplies). Smart rents space above a shopping mall in Halifax which contains classrooms and practical work space of a salon. During certain hours, students offer services to outside customers in the salon as part of their training with their instructors overseeing their work. They also sell a small amount of product to customers using the salon.
Jessie Weeks is the President of the company and her background is in the cosmetology industry. She has just hired you, CPA, as her new director of finance. Smart’s previous director of finance left about ten months ago. Smart has a bookkeeper but Jessie has been overseeing the accounting in the meantime so is very relieved to have you on board.
It is now August 6, 2020 (your second day on the job!) You have just finished a meeting with Jessie to be
iefed on the accounting issues at Smart. Jessie’s immediate concern is Smart’s annual financial statements for their June 30 year end. GAAP financial statements must be provided to their bank by August 31. Smart is required to have a debt ratio (total liabilities/total assets) not exceeding 0.6 (excluding goodwill) as a condition of their bank term loan and line of credit. The notes from your meeting with Jessie are in Exhibit I and the draft financial statements prepared by the bookkeeper are included in Exhibit II.
Required
Prepare a memo to Jessie discussing the financial accounting issues and your recommendations for the June 30, 2020 financial statements.
Exhibit I
Notes from Meeting with Jessie
1. The leasehold improvements relate to the renovation (creation of classrooms, etc.) of the leased space four years ago. Smart had signed a five year lease at that time but had the first right for renewal of their lease for a five further years at a modest increase. As such, they were amortizing the improvements straight-line over ten years. A developer has purchased the mall in May and they gave Smart notice that they must vacate the premises in July 2021 when their lease is up. Smart’s lawyer has reviewed the lease and has confirmed that a clause in the lease allows the landlord to do this without compensation.
2. The salon customers are important to Smart as part of the training hours needed for the students. Smart introduced a Salon Loyalty card six months ago to customers to encourage them to return for future services. If a customer purchases nine services, they get one free. The average service revenue is $35 and the cost to provide services averages $ XXXXXXXXXXservices have been provided under this program since issuing the cards (and included in revenue) and 100 free services have been claimed (not recorded, 4100 services in total). Jessie has researched similar programs and approximately 60% of customers will ultimately receive a free service. No provision has been made in the accounts for future services to be provided from this program.
3. Some of the Make-up program’s students from the past year were very unhappy with their program and requested full tuition refunds which were denied. Ten students have filed a joint legal claim for tuition, lost wages while taking the program, and legal costs. The total claim is $400,000. Smart’s lawyer believes that they will likely settle and this is the best option for Smart. She believes that there is a 60% chance they will settle for half of the tuition ($55,000) and a 35% chance the students will settle for the full tuition ($110,000.) There is a small chance that they will take the claim to court in January where the outcome is unknown. No provisions have been made in the accounts.
4. During the year, Jessie had the College’s website completely redone. The new website was launched in June. It now has much more functionality and ease of use including allowing students to apply for a program and pay on-line (this was done manually in-person before). Jessie paid $25,000 during the year to a developer for the software and development work. Her staff also spent two days in training to use the software and their time would be valued at $1,400. Jessie also estimates that she used about $3,600 of her time in meetings relating to this project. She is wondering if she could include the costs as an asset as she has expensed these amounts.
Exhibit II
Draft Financial Statements
Smart Career College Ltd.
Income Statement
Year Ended June 30
(Draft )
$1,111,000 282,494
$1,078,000 283,261
12,266
11,891
1,405,760
1,373,152
563,050
582,120
64,847
64,933
81,200
81,200
22,320
20,930
26,042
22,861
30,000
52,876
49,622
4,875
5,425
845,210
827,091
560,550
546,061
140,137
136,515
$420,412
$409,545
2020 2019 Revenues:
Tuition
Salon
Retail
Expenses:
Salaries and benefits
Supplies - salon & retail
Rent
Utilities & maintenance
Depreciation
Website costs
General administrative
Interest
Income before taxes
Income tax expense (25%)
Net income
Exhibit II (continued)
Smart Career College Ltd.
Balance Sheet
June 30
(Draft)
Assets
Cu
ent assets Cash
$ 36,621
$ 28,280
Tuition receivable