Marys Boutique

Your friends mother Mary Brooks has opened Marys Boutique Ltd. in a nearby shopping mall. She began her business on February 1, Year 2007. She invested on that day $20,000 in share capital and her husband Tom contributed another $20,000 as a loan to the firm. The loan bears interest at 10% per annum and none has been paid to date. Mary found the business exciting and she seems to have been successful as a business person but the question is how successful? She has no formal training as an accountant but does keep a summary of selected transactions for the fiscal year ended JANUARY 31, YEAR 2008. Cost of merchandise purchases on account$34,600 Wages paid to assistant..$9,200 Salary paid to herself..$12,000 Rent paid..$4,800 Business taxes & licenses..$330 Supplies purchased for cash.$2,950 Miscellaneous expenses paid..$6,340

During the year the boutique sold merchandise for $57,600 of which $8,900 was for cash and she collected all credit sales made except for $5,300. However, Mary expected to eventually only collect $4,100 from these outstanding receivables. Mary had recorded the cost of each item sold during the year and this totaled $24,800. The cost of the merchandise still on hand was $8,700 which leaves $1,100 of purchases unaccounted for (probably shoplifters). At January 31 2008 she estimated supplies on hand had a cost of $250 The bank had deducted interest and bank charges totaling $1,400 from the boutique bank account. The major portion of this was for interest on the demand loan from the bank which has a principal amount of $10,000. This loan is fully secured by a government savings bond that Mary purchased for $10,000 for the firm when she first opened for business. The current market value of this investment is $10,200. The boutique had received $600 interest on this investment and another $400 had been earned but not accrued at year end. The bank balance at January 31, 2008 shows as $7,480

When the business was formed, a friendly insurance agent sold her a two year business insurance policy with a premium of $480 for the two years. She paid cash for the policy and included the bill in her miscellaneous expenses. When she moved into the store she paid the previous occupant $20,000 for the existing furniture and fixtures which she estimated would last her easily another ten years. Mary maintains excellent relations with her suppliers and has never had a dispute of any kind. She currently owes them $6,200. Since the business is incorporated it has to pay income taxes to Revenue Canada. She qualifies for the small business tax rate of 20% REQUIRED: Prepare a set of financial statements in good form to show the results of year 1 for Marys boutique. If you think there is missing data or just cant come up with the required amount, then explicitly say so and use the notation let the missing number be X so you can continue to draft your statements. If you think that for some reason that an assumption is called for, then also state it clearly on your exam paper. 2) Conclude whether you think Mary will have a successful career as a boutique operator.

Marys Boutique Approach.this case is actually highly directive asks for set of financialstherefore..journalize the transactions and post to T accounts. A hot shot might try to skip journal entries or even skip the T accounts but at this junctureyou should start with baby steps and take the low risk , albeit slower approach. However, by exam time you have to be a hotshot.it is too time consuming to do journal entries so make entries in T accounts directly on exams. Note on procedure..we normally process transactions sequentially as we encounter them in a case if it is an easy one. An easy one lists will provide you the data in chronological order. Sometimes you read information that you know will trigger AJEs at month end. You can either attempt them immediately in special section for AJEs or just mark the passage with highlighter and do all the AJEs together at year end.note also that this case does not require monthly financials. Note 2 on Procedure..it makes a difference whether financials are being asked for in good form or just as a conduit to making some decision. Good format statements take 3 times longer so go for speed here

#1 Dr Cash 20,000

Cr Common Shares 20,000

(Start business by depositing cash for shares)

#2 Dr Cash 20,000

Cr Long Term Loan Payable 20,000

(to record loan from Tom which bears interest at 10%.....case doesnt mention short term or long term and we will have to classify it for the B/S but sounds like it is being used as long

term capital. AJE will be needed for interest)

#3 Dr Purchases 34,600

Cr Accounts Payable 34,600

(to record Purchases for year)

Journal entries for Marys Boutique #4 Dr Wages & Salary Expense 9,200

Cr Cash 9,200

(annual wages to employee)

#5 Dr Wages & Salary Expense 12,000

Cr Cash 12,000

(annual wages to herselfnote that this is only possible in a corporation)

#6 Dr Rent Expense 4,800

Cr Cash 4,800

(Annual rent)

Journal entries for Marys Boutique #7 Dr Business taxes & Licenses Expense 330

Cr Cash 330

(business taxes for the year)

#8 Dr Prepaid Supplies 2,950

Cr Cash 2,950

(purchase of supplies .. will require AJE)

#9 Dr Miscellaneous Expense 6,340

Cr Cash 6,340

(payment of miscellaneous expense)

Journal entries for Marys Boutique #10 Dr Accounts Receivable 48,700

Dr Cash 8,900

Cr Sales 57,600

(to record sales for the year)

#11 Dr Cash 43,400

Cr Accounts Receivable 43,400

(to record collections on account AJE required for bad debts)

#12 Dr Supplies Expense 2,700

Cr Prepaid Supplies 2,700

(to record usage of supplies for the year)

Journal entries for Marys Boutique #13 Dr Inventory 8,700

Dr Cost of Sales 24,800 Dr Cost of Sales 1,100 Cr Purchases 34,600

(Since the case uses the term purchases and makes no mention of perpetual system we assume periodic system.

This entry is standard procedure for recording cost of sales and setting up balance sheet inventory. Also standard

procedure to bury minor inventory shortages in C of S . ... large write downs might get separate disclosure)

#14 Dr Cash 10,000 Cr Bank Loan Payable 10,000

( record bank Loan)

#15 Dr Interest Expense 1,400

Cr Cash 1,400 (interest on bank loan.note that case doesnt mention any dates so we cant be sure if accrued right up to 1/31.but with no info no

entry)

#16 Dr Long Term Investments 10,000

Cr Cash 10,000

(Another ambiguity of the case.we need to know whether short or long term for B/S classification. We assume short term also

you will lean in Module 7 that the $10,200 market value is ignoredpart of LCM calculation)

#17 Dr Cash 600

Dr Interest Receivable 400

Cr Interest Income Earned 1,000

(to record interest on the savings bond)

#18 Dr Prepaid Insurance 480

Cr Cash 480

(purchase of 2 year insurance policy..two things to watch out for.AJE at year end to recognize expense..curious phrase in case..included this in miscellaneous expense.will have

to be on lookout for error)

#19 Dr Furniture & Fixtures 20,000

Cr cash 20,000

(Purchase of furniture.note that depreciation will be required as AJE)

#20 Dr Accounts Payable 28,400

Cr Cash 28,400

(Only one previous entry charging A/P and since we are told the ending balancethe difference must be payment on account)

Adjusting Journal Entries for Marys Boutique #21 Dr Interest Expense 2,000

Cr Interest Payable 2,000

(set up accrued interest on the loan to Tom)

#22 Dr Bad Debt Expense 1,200

Cr Accounts Receivable 1,200

(writing off uncollectible accounts)

#23 Dr Insurance Expense 240

Cr Prepaid Insurance 240

(to record expiry of half the insurance)

#24

Dr Depreciation Expense 2,000

Cr Accumulated Depreciation 2,000 (straight line depreciation on furniture20,000 over ten

years)

Note: We can now post to the T accounts and take a trial balance to ensure we made no errors. Note 2: that we were given the ending cash balance of $7,480 so this represents an ideal check on your work. If your T account doesnt come to this balance then you have missed something

Note 3: Income tax entry still to do

CASH

20,000 20,000 8,900 43,400 10,000 600

9,200 12,000 4,800 330 2,950 6,340 1,400 10.000 480 20,000 28,400

Balance = 7,000 = bummer..balance is supposed to be 7,480

CASH

20,000 20,000 8,900 43,400 10,000 600

9,200 12,000 4,800 330 2,950 6,340 1,400 10.000 480 20,000 28,400

Balance = 7,000 = bummer..balance is supposed to be 7,480

We see a 480 credit which is the amount of the dierenceif we go back and read the case.Mary dumped this in miscellaneous expense so we have double counted

CASH

20,000 20,000 8,900 43,400 10,000 600

9,200 12,000 4,800 330 2,950 6,340 - 480 1,400 10.000 480 20,000 28,400

Balance now = 7,480 = hip hip hurray !

In addiFon to reducing cash disbursements by 480, we also need to drop Miscellaneous Expense by this amount since it should have properly been set up as a prepaid expense

Marys BouFque Ltd. Income Statement For the year ended January 31,2008

Note that this income statement is in draft format for the purpose of calculating the bottom line but is not considered to be good format for external publishing. The heading, underscores and $ signs are absent. Also, in strict GAAP interest revenue and expense are typically separated from other items and shown near the bottom of the statement. The other financial statements are also only in draft format

Marys BouFque Ltd. Statement of Retained Earnings

For the Year Ended January 31, 2008

Note that a debit balance in Retained Earnings is properly referred to as a deficit. There are certain legal implications for a company with a deficit but this is a topic for later modules. Also note that the word deficit has a different meaning in government accounting. In that context it refers to the current period excess of expenditures over revenues. The accumulated government deficits of several years is referred to as the national debt. For instance in 2011 the federal deficit is expected to be about $45 Billion but the National Debt is about $900 Billion. In the USA the deficit is about $1 trillion each year but the national debt is too many zeros to fit in a calculator. if you follow the news closely you will note that the USA is near bankruptcy and has to pass special borrowing acts each year just to prevent the government from shutting down. Thank your lucky stars you live in Canada.

Marys BouFque Ltd. Balance Sheet As at January 31, 2008

Now for the key question: Is Marys business a success or failure???

Net Income is negative .. a $9,200 loss..You can have a loss for a year or so, but if that is the pattern year after yearthen you have a one way ticket to oblivion We need to look at Marys revenues and expenses to see if anything is extraordinary. i.e., not likely to repeat in future years (remember the discussion of normalized income in Demarco and Jesse?) Unfortunately, we dont see anything so if year 2 and 3 are a repeat she is doomed to failure. At this point Mary has to sit down and think.how can I raise revenues or cut costs next year? You raise revenues by either increasing mark-up or by increasing volumeshe needs to rethink her sales strategy There is one major cost cut she can achieve if she wanted to make the F/S look good to show to a bank or whoeverdont take a salary until things improve if she can live off personal savings.$12,000 less expense or go with plan B fire the assistant ($9,200) and work long hours herselfthis is usually the formula in a new business60 hour weeks at minimum wage and forget the family.having an employee is a luxury Mary can not yet afford

Marys Boutique

Rest In

Peace