Algonquin Outfitters Background You are an Analyst for the professional service
ID: 2567644 • Letter: A
Question
Algonquin Outfitters
Background
You are an Analyst for the professional service firm, BUSI 1043 LLP. Your firm specializes in providing a wide variety of internal business solutions for different clients. Since you enjoyed your time in Muskoka compiling the Financial Statements for Henrietta’s Pine Bakery, the Senior Manager from your previous engagement gave you another northern Ontario client, Algonquin Outfitters.
Additional Information
Since 1961, Algonquin Outfitters (AO) has been providing outdoor fun and gear for everyone from families to back-country adventurers. The family of stores in Algonquin Park and Muskoka has a range of equipment including outerwear and casual wear, mountain and road bikes, canoes, kayaks, wakeboards and waterskis, snowboards, alpine and nordic skis, and snowshoes. More than just canoe trips, day hiking trips, and gear outfitting rentals they have grown in the 50 + years to be Muskoka’s destination for great outdoor gear, ski and snowboard service shop, bike shop, and all your other Algonquin & Muskoka adventure service and rental needs.
Algonquin Outfitters follows the Accounting Standards for Private Enterprises. Despite its revenues, AO operates with few administrative staff currently employing 12 individuals in addition to the owner who is there every day.
The owner is considering expanding his operations into the Haliburton Highlands. In order to do so he will have to look into financing options. He is contemplating two debt options: traditional bank financing or bonds. He is also considering selling some of his common shares to five of his friends and relatives. He is unsure of how these options would impact him and the current organization of his company.
In December of this year, one of AO’s trucks carrying bike and ski lubrication was in an accident. The substance spilled into a local river contaminating the water supply. AO’s layers have stated that the local residents have filed a lawsuit for $2 million. They expect that AO will be found guilty but the settlement will be between $1.0 million and $1.8 million. AO has let its insurance policy expire and therefore does not have any coverage.
On December 31, four of AO’s trucks were loaded with customer freight and sitting at AO’s loading docks. The goods were delivered to the customers on January 5th and 6th respectively. The revenue of $80,000 was recorded in the books on December 31st.
The owner knows about the importance of internal controls but believes he needs a refresher. He had an individual from purchasing leave earlier this year and is now using the accounts payable person who also prepares the cheques to take care of all purchases. He is beginning to think that this is a good idea as it would save one salary. On the other hand, he does want to maintain controls and is interested in eliminating all potential problems. He would like your recommendations about how he should deal with this.
AO purchased equipment on January 1 five years ago for $80,000 and estimated an $8,000 salvage value at the end of the equipment’s 10-year useful life. On March 31st of this year, the equipment was sold for $21,000. The last entry to record depreciation was at December 21st of the prior year. No entries for the sale have been made yet.
The year end for AO is December 31st. It is now April 20th and you have been asked to provide a memo to your Senior Manager that can be used as the basis for discussion with the owner that addresses the issues that concern you and the owner. You must address all of the issues in depth and provide recommendations on how to account for them.
Prepare the memo.
Explanation / Answer
A.Expansion of operation
The owner is considering expanding his operations into the Haliburton Highlands. In order to do so he will have to look into financing options. He is contemplating two debt options: traditional bank financing or bonds. He is also considering selling some of his common shares to five of his friends and relatives. He is unsure of how these options would impact him and the current organization of his company.
Advantages of traditional bank financing
Disadvantages of traditional bank financing
Advantages of issuing bonds
Disadvantages of issuing bonds
Advantages of issuing stocks
Disadvantages of issuing stocks
AO has to analyse all the advantages and disadvantages and take the right decision.
B. In December of this year, one of AO’s trucks carrying bike and ski lubrication was in an accident. The substance spilled into a local river contaminating the water supply. AO’s layers have stated that the local residents have filed a lawsuit for $2 million. They expect that AO will be found guilty but the settlement will be between $1.0 million and $1.8 million. AO has let its insurance policy expire and therefore does not have any coverage.
Since AO doesn’t have insurance hence AO has to record provision for claim that local redident has demanded
A provision is a liability of uncertain timing or amount and a provision shall be recognised when:
If these conditions are met, provision shall be recognised.
Since a provision is meeting all the criteria listed above, AO has to record provision in its books with the amount of $1.8 million
C. On December 31, four of AO’s trucks were loaded with customer freight and sitting at AO’s loading docks. The goods were delivered to the customers on January 5th and 6th respectively. The revenue of $80,000 was recorded in the books on December 31st.
Revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants.
Revenue from the sale of goods shall be recognised when all the following conditions have been satisfied:
Since in this case, Goods were delivered on Jan 5th and 6th Respectevely hence first condition listed above is not met, AO cant record revenue on December 31st.
D.The owner knows about the importance of internal controls but believes he needs a refresher. He had an individual from purchasing leave earlier this year and is now using the accounts payable person who also prepares the cheques to take care of all purchases. He is beginning to think that this is a good idea as it would save one salary. On the other hand, he does want to maintain controls and is interested in eliminating all potential problems. He would like your recommendations about how he should deal with this.
Internal Control is a process for assuring that risks are minimised in achieving an organization's objectives in operational activities, financial reporting, and in complying with laws and policies. Control should be there is business and he cant ignore it. He has to bring back the person who will handle internal control.
E. AO purchased equipment on January 1 five years ago for $80,000 and estimated an $8,000 salvage value at the end of the equipment’s 10-year useful life. On March 31st of this year, the equipment was sold for $21,000. The last entry to record depreciation was at December 21st of the prior year. No entries for the sale have been made yet.
Depreciation= (Cost- Salvage value)/Useful life
= ($80000-$8000)/10
= $7200 Per year
Net Book value at the end of 4th year was $51200 and the equipment was sold for $21000 hence loss of $30200 will be recognised assuming depreciation is charged on yearly basis.
Accounting entry to record the transaction would be:
Bank A/c DR – 21000
Loss on sale of equipment DR- 30200
To Equipment CR- 51200
Year Gross block Depreciation Net block 1 80000 7200 72800 2 72800 7200 65600 3 65600 7200 58400 4 58400 7200 51200 5 51200Related Questions
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