Accounting Homework
- Round numbers to the nearest whole amount (e.g., round $125.43 to $125).
- Round ratios/percentages to the nearest whole percent (e.g., round 12.58% to 13%).
Jake’s Music Company
Jake Brown, a musician, has over 20 years of musical background. He started Jake’s
Music Company on January 1, 2020. Located in Phoenix, AZ, the company offers piano
and music theory lessons and sells instrument accessories such as metronomes,
adjustable benches, music stand lamps, and cleaning kits and tools.
After what Jake feels was a successful first year, he is excited to see how the company
has performed. The company’s year-end is December 31.
He has asked you to create a set of financial statements, excluding the statement of
cash flows (Jake believes he has a good understanding in how to do this). Jake will use
these statements for his own use to assist with planning for the future of the company.
Exhibit 1 includes an unadjusted trial balance at December 31, 2020.
Exhibit 2 includes information on 2020 transactions which require analysis and
ecording using Accounting Standards for Private Enterprises (ASPE).
Required:
1. Prepare the journal entries for 2020, including any required year-end adjusting
entries.
2. Prepare the Statement of Earnings, Statement of Retained Earnings, and Statement
of Financial Position, for the period ended and as at December 31, 2020.
3. Prepare a professional memo to Jake Brown outlining 2 internal control
weaknesses. Include an explanation of what can go wrong as a result of each
weakness, and recommended changes.
· Use the format provided below.
Required Memo Format
TO:
FROM:
DATE:
RE:
Internal Control weakness 1
Description of weakness
Explanation of what can go wrong as a result of the weakness
Recommended change
Internal Control weakness 2
Description of weakness
Explanation of what can go wrong as a result of the weakness
Recommended change
What are control weaknesses?
Control weaknesses may relate to the control of cash or any other assets that a
company has. Companies should have internal controls in place to protect their assets.
Controls may also relate to processes and procedures of a company. When internal
controls are missing or weak, a company is said to have an “internal control weakness”.
Example of internal control weakness for a toy manufacturer:
Description of weakness: The back door to the company’s warehouse where
inventory is stored is kept open and unlocked throughout the day, every day.
Explanation of what can go wrong as a result of the weakness:
Outsiders/unauthorized people can get into the warehouse and steal inventory
Recommended change: Ensure the back door is kept locked at all times and provide
entry only to authorized people such as employees and delivery personnel.
Example internal control weakness for a farming business:
Description of weakness: Farm employees are allowed one free bucket of
strawbe
ies per week during strawbe
y season. Employees can pick strawbe
ies from
the field and fill a bucket themselves.
Explanation of what can go wrong as a result of the weakness: Farm employees
may take more strawbe
ies than only one bucket a week which will result in the farm
giving away more free strawbe
ies than it intended and this will reduce profit for the
usiness.
Recommended change: Implement a system that farm employees must sign off a
master list when they have taken their one free bucket of strawbe
ies a week. A
manager should monitor the list as well as watch for employees who appear to be
taking a bucket of strawbe
ies when they have already signed off on the master list and
should be reprimanded if found doing so.
You may be able to think of alternate implications and recommendations for the internal
control weaknesses above; that’s fine as there is not only one right answer.
There are several control weaknesses in this example about Jake’s company. Find any
2 and use the same format as above to explain each one separately.
Exhibit 1
Jake’s Music Company
Unadjusted Trial Balance, December 31, 2020
Account name Debit CAD$ Credit CAD$
Cash 4,200
Accounts Receivable 2,500
Supplies 2,600
Inventory - Benches 4,000
Inventory - Metronomes 2,000
Inventory - Lamps 500
Inventory - Cleaning Kits 2,275
Prepaid Insurance 2,700
Storefront Sign 3,000
Furniture & Fixtures 10,000
Computer Equipment 3,000
Accounts Payable 3,500
Contributed Capital 1,000
Retained Earnings (January 1, 2020) -
Service Revenue 74,250
Sales Revenue 31,805
Cost of Sales 17,980
Rent Expense 14,400
Salaries Expense 38,400
Marketing Expense 3,000
Total $110,555 $110,555
Exhibit 2
Additional information
1. Jake’s Music Company uses a perpetual inventory system. Below is a
eakdown of
inventory on hand at December 31, 2020:
Quantity Unit Cost Total Cost Net Realizable
Value
Inventory - Benches 20 $200 $4,000 $3,800
Inventory - Metronomes 40 $50 $2,000 $2,250
Inventory - Lamps 25 $20 $500 $550
Inventory - Cleaning kits 65 $35 $2,275 $2,150
2. The company ran out of a popular lamp. They placed an order for 30 of these lamps on
account at a cost $20 each on December 28, 2020. Terms of this order were 2/10, n/30
FOB shipping point. They received an email notifying them of shipment on December 31,
2020. Jake looked forward to replenishing this popular item and adding it to inventory
upon receipt.
3. A count of supplies was also done on December 31, 2020 where $1,550 worth of
supplies was found on hand.
4. An insurance policy was purchased in March 2020 for the next 12 months starting April
1, 2020.
5. Jake was extremely happy when the custom storefront sign a
ived on April 1, 2020; just
in time to be put up before the store’s official grand opening! He hopes that the sign will
last for the next 15 years.
Jake spent a lot of money setting up the store. The furniture and fixtures he invested
in (all of which was incu
ed within the first couple days of January) are expected to
last for the next 10 years.
Jake wanted to ensure that he could monitor the store’s operations and his teaching
schedule. As such, he invested in both a laptop and tablet. Everything was
purchased on January 1, 2020. He expects that both the laptop and tablet would be
valuable for the next 5 years where he would need to expect to upgrade.
Straight-line method is used for all non-cu
ent assets.
6. Jake offers online piano and music theory lessons. Lessons are sold individually or in
packages. An individual lesson sells for $100. Packages of 5 lessons sell for $450 and
packages of 10 for $850. Customers must pay for the full amount before the lessons
egin.
All sales are done with cash and/or credit card and payment is assumed collectible
upon sale. Cash received from the sales is deposited in the company’s bank account
at the end of each month. Bank reconciliations are prepared on an annual basis.
There were 10 lesson packages sold in December 2020, but the lessons will not
take place until January 2021 due to the Christmas holidays. These were all
5-lesson packages and the customers paid in full and look forward to learning from
Jake. These lessons have been recognized as service revenue in December 2020,
given it was the period in which cash was collected.
7. A customer bought a 5-lesson package in September 2020, and the lessons occu
ed in
oth September and October. The customer promised to pay for the package on Octobe
15, however they have yet to pay this amount owing and all methods of contacting them
have been exhausted and the amount has been deemed uncollectible.
This has Jake wo
ied that 10% of all his accounts receivable at the end of the yea
will not be collected.
8. The following information regarding payroll needs to be considered in preparing year-end
financial statements (ignore payroll taxes):
Employee Pay rate Pay frequency
Jake Brown Annual $84,000 15th of the month (for work
done in the previous month)
9. The company is subject to income tax and the tax rate is 30%.
10. Jake hired a payroll clerk, who is a very hard worker and did not take vacation in 2020.
Employees do not typically report payroll e
ors, so Jake does not need to monitor the
payroll clerk closely.