Updated Assignment 5-7

ACC571_Final Project

Pyramid Holdings Limited Contributed by Jeffrey Botham and Bruce J. McConomy Lazaridis

School of Business & Economics, Wilfrid Laurier University

Pyramid Holdings Limited (PHL) is a private company based in Winnipeg, Manitoba, that offers

storage solutions, such as shelving units and organizers, to a variety of business clients. Joan

Chen has been the bookkeeper for PHL for several years, and prepared a preliminary trial

balance for the fiscal year ended March 31, 2017 (Exhibit I). The company chose a March year

end to coincide with its business cycle. The company’s owner, James Steel, has been thinking of

taking the company public in three or four years and would like to ensure the financial

statements are attractive to potential investors.

When Joan Chen presented Jim with the preliminary trial balance for the 2017 fiscal year,

a number of things struck him as being not quite right. Joan is not a CPA, so Jim prepared a list

of items for follow-up with the auditor to make sure they are dealt with correctly (Exhibit II).

During a heated discussion with Joan about several of the contentious issues on the list, Joan

walked out of the meeting and quit before preparing PHL’s final trial balance and financial

statements.

You are the replacement bookkeeper assigned by the ABC temp agency to help PHL

prepare financial information for the auditor. You are currently completing your business degree

in the evenings, and hope to write your CPA examinations in a year or two. The auditor will be

arriving in a week. Jim offered to hire you as a full-time replacement, once your two-week

assignment as a temporary bookkeeper is up, as long as you can “make the numbers look good”

for him and the company. He indicated that he expects that when the company goes public, he

will be able to pay you a $6,000 bonus “if you can get the job done right.” By coincidence,

$6,000 is the exact amount you owe for your student loan, so it would come in quite handy!

You were able to call Joan, who provided you with some additional information (also in

Exhibit II) be fore she left on a six-month trip to “parts unknown” where clearly, she does not

want to be contacted again.

Required

PHL follows ASPE, and Jim has instructed you (and the auditors) to use the simplest methods

allowed for PHL’s financial statements. (Note: round all calculations to the nearest dollar.)

(a) Prepare all adjusting entries required for the March 31, 2017, financial statements and

also include them in an adjusted trial balance work sheet.

(b) Jim would also like you to prepare a draft statement of financial position and draft

income statement for discussion with the auditor. For purposes of calculating tax expense for the

draft financial statements, you can do what Joan has done in prior years: ignore the impact of any

timing differences and assume that accounting income equals taxable income. (The auditors will

provide a more specific estimate in a few weeks.)

(c) Jim is also hoping that you can briefly summarize the requirements of “going public”

for him, so that he will be prepared to discuss this with the auditors. (He specifically said you do

not have to “run the numbers” for going public, he just wants to have an overview of the

requirements of going public, including whether it will have any impact on PHL’s accounting

policies.) There is no need to do an extensive report on the impact of going public in a few years,

because Jim is relying on the auditors to provide that analysis separately next year.

Exhibit I- Financial Statements

Joan’s Notes (see also Exhibit II)

» Remember to ask auditor about the shareholder loan and repayment.

» Professional fees for audit and going public?

» What to accrue for payroll that will be paid covering March 28 – April 8, 2017, for $10,000? (The $10,000 covers

all employees, and the standard work week is Monday–Friday, with paydays occur ring every second Friday.)

EXHIBIT II – ITEMS FOR FOLLOW-UP WITH AUDITOR

The following is a list of items for follow-up with the auditor compiled by Jim. It includes

information pro vided by Joan to you.

» PHL purchased a used delivery truck for $10,000 on July 1, 2016, and it was expensed as part

of Vehicle Expenses.

» The lease payments for the company car, used mainly by the VP of sales for visiting clients,

are in correctly recorded under Vehicles—Leased. The monthly payments are $400 and began on

May 1, 2016, for a three-year lease. (Note: only the first 10 months of payments had been made

by March 31, 2017.) If PHL had purchased the car, it would have cost $30,000. The car has an

expected useful life of six years.

» The company’s heat, electric, water, and related utility bills had not been received when Joan

pre pared the financial statements, so she accrued a total amount of $1,000 for the three bills in

the trial balance. When the final invoices arrived, the cost actually totaled $2,500, due to an

extremely cold winter and repairs needed to a frozen water pipe. In addition, there was $10,000

damage (to carpets and so on) due to the flooding caused by the frozen pipe. Joan did not record

the $10,000 amount disbursed because it should be covered by the company’s insurance policy.

There is an $800 deductible on the insurance claim that remains outstanding and will be

deducted from the reimbursement from the insurance company.

» ATL Bank had loaned the company $20,000 during the first week of the 2016–17 fiscal year,

and the company made a payment of $5,000 to the bank on November 1, 2016. Joan admitted

she had not recorded the payment, and was going to speak with the auditor about it when they

came in for the year-end audit. The bank charges 6% interest on the loan, but Joan did not record

any interest because she did not consider it material. ATL charges its usual prime plus 1% (that

is, 6%) on the loan, with the interest due on the anniversary date each year. The $20,000 amount

is included on the trial balance in Accounts Payable.

» The audit fee was estimated at $25,000. However, the audit firm has indicated that it will

charge an additional $20,000 to help prepare an initial consulting report regarding factors to

consider when Jim eventually takes the company public. The audit firm estimates that the

consulting report and related work was “90% complete” on March 31, 2017. Neither of these

items have been recorded in the trial balance.

» A shipment of inventory valued at $1,500 was shipped by a supplier on March 28, 2017,

scheduled to arrive at PHL on March 30, 2017, but it arrived on April 3, 2017. It was delayed

because it was shipped by truck and got caught in a snowstorm. The shipment was FOB shipping

point. Joan re cords shipments based on the arrival date at the company’s warehouse and

therefore no entry had been made to include the inventory. Of course it was also not included in

the physical count that took place on March 31, 2017, as it was not present for warehouse

personnel to count.

» The company has not performed a detailed analysis of its allowance for doubtful accounts

since the auditors were in last year; it was $5,600 at March 31, 2016 (before any accounts

receivable were writ ten off during the 2016–17 fiscal year). Joan booked a preliminary estimate

of $3,600 of bad debts for fiscal 2016–17, because she did not know how the amount recorded in

2015–16 was calculated. Joan knows that the auditors like to see an aged accounts receivable

schedule on the first day of their audit, so she has prepared one (Exhibit III).

» Joan took a week off between March 24 and March 31, and the invoices for new office

furniture purchases that came in during that period totaled $15,000 and were recorded in

inventory by her assistant. The office furniture had arrived at PHL on March 1, 2017, and is

expected to last 10 years.

» Joan and her assistant attended the inventory count at the main warehouse. Similar to March

31, 2016, the owner assured her that there was “$50,000 of good inventory” at Warehouse #2, a

ware house in Brandon, Manitoba, that is rented from the owner (Jim’s father) at a cost of $2,000

per month. Joan never verified the existence of the inventory, nor had she (or the auditors) even

been to the warehouse. The cost of the goods purchased was “paid for” by the note payable that

appears on the trial balance. The note is non–interest-bearing, so Jim says he is in no hurry to pay

it. The $50,000 of inventory was originally purchased on December 31, 2014, according to Jim.

» PHL uses straight-line depreciation for all of its property, plant, and equipment other than

vehicles (where double declining-balance depreciation is used). Aside from the items discussed

above, there were no additions or disposals during the year. Property, plant, and equipment items

are estimated to last for 10 years, and vehicles for five years. Joan had not recorded any

depreciation expense for the 2016–17 year before she quit. However, depreciation charges prior

to 2016–17 have been audited and were done correctly.

» Jim had arranged a special deal with one of his best customers (BCL) on October 1, 2016. The

deal allowed the customer to purchase $22,000 (cost) of inventory for a price of $35,000. The

“special” part of the deal was that BCL would not have to make any payments on the $35,000

outstanding amount for the goods until October 1, 2020. In addition, BCL would only be charged

2% interest on the amount outstanding to be paid each year on October 1. BCL was quite pleased

with this deal because it has a bit of a cash flow problem, so BCL’s bank charges it prime plus

3% (8% annually) instead of the 6% charged to PHL. Joan recorded the sale of $35,000 and the

cost of goods sold of $22,000 in October 2016, but was unsure if other entries were needed.

» PHL pays tax at a 25% tax rate, and Joan had told Jim that based on her discussions with the

auditors, “once again there are no permanent differences, so under ASPE taxes are pretty simple

to calculate.” Joan left before estimating the tax expense for fiscal 2016–17. However, she sent a

cheque to the Canada Revenue Agency for $20,000 on March 15, 2017, because that was the tax

expense from fiscal 2015–16, and so it was her best guess as to how much PHL will owe in taxes

for fiscal 2016–17. However, she did not record the $20,000 payment before she left.

» When Joan provided Jim with the preliminary trial balance (Exhibit I), she included a few

questions for the auditors at the bottom of the trial balance. You hope to be able to impress Jim

by also dealing with these questions before the auditors arrive!