finance

Module 5.1 — Intermediate Financial Reporting 1

PROJECT 1 (36 marks)

Jassal Music Inc. is located in Edmonton, Alberta, and reports its financial information using IFRS. The company has six primary lines of business:

It sells musical instruments.

It sells related music products (including sheet music, strings, replacement parts, cases). It has a school rental program (for musical instruments).

It provides music lessons.

It tunes and repairs musical instruments.

It sells a specialty brand line of Allegro Quality Instruments.

The company has eight staff members, all of whom (except for you, the accountant) teach music and work in the sales area when they are not teaching. The company’s unadjusted trial balance at December 31, 20X4, is presented below:

Debit

Credit

Cash

275,612.00

Accounts receivable — trade

24,500.00

Allowance for doubtful accounts

85.00

Accounts receivable — school program

48,000.00

Prepaid insurance

25,500.00

Inventory — school rentals

36,990.00

Inventory — instrument sales

114,524.00

Inventory — related products

35,700.00

Inventory — not owned

51,750.00

Note receivable — R. Tower

3,695.00

Investment in PLZ shares

84,240.00

Investment in General Company bonds

250,000.00

Investment in mortgage option

5,000.00

Investment in mortgages

512,000.00

Land

279,400.00

Warehouse

126,000.00

Accumulated depreciation — warehouse

27,550.00

Store

368,400.00

Accumulated depreciation — store

78,285.00

Tools and other equipment

38,850.00

Accumulated depreciation — tools and other equipment

24,605.00

Vehicles — delivery, service, sales

35,000.00

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Module 5.1 — Intermediate Financial Reporting 1 Project 1

Accumulated depreciation — vehicles

14,400.00

Office equipment

8,500.00

Accumulated depreciation — office equipment

3,400.00

Computer equipment

12,300.00

Accumulated depreciation — computer equipment

4,950.00

Customer list

10,000.00

Accumulated amortization — customer list

5,000.00

Accounts payable

242,700.00

Payroll taxes payable

4,240.00

Short-term note payable

3,500.00

Current portion of long-term debt

7,200.00

Long-term debt

36,000.00

Preferred shares (2,000 shares outstanding)

50,000.00

Common shares (750 shares @ $400 / share)

300,000.00

Retained earnings

321,625.00

Revenue — instrument sales

2,637,358.00

Revenue — sales — related products

571,577.00

Revenue — school rental program

122,000.00

Revenue — lessons

198,600.00

Revenue — tuning and repair

64,100.00

Revenue — Allegro sales

388,125.00

Cost of goods sold — instrument sales

1,423,598.00

Cost of goods sold — related products

355,794.00

Cost of goods sold — Allegro

310,500.00

Cost of goods sold — lessons, tuning and repair, and other

38,600.00

Advertising

4,500.00

Audit and legal fees

13,907.00

Interest expense — long-term debt

3,225.00

Insurance expense — property, building and casualty

15,200.00

Insurance — automobile

2,500.00

Investment transaction costs

309.00

Janitorial services

7,800.00

Office expenses

4,800.00

Property taxes

18,600.00

Training and development

3,200.00

Telephone

6,685.00

Utilities

7,200.00

Wages, salaries and benefits

432,000.00

Dividend income

2,025.00

Gain (loss) on investment in PLZ shares

52,785.00

Interest income — note receivable

339.00

Mortgage interest income

57,980.00

Gain / loss on purchase of property, plant and equipment

150.00

Gain / loss on sale of property, plant and equipment

800.00

Income tax expense

225,000.00

$5,219,379.00

$5,219,379.00

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Module 5.1 — Intermediate Financial Reporting 1 Project 1

The following are the main events that have occurred in the company’s fiscal year ending December 31, 20X4:

• Jassal Music renewed the commercial and business insurance policy in August 20X4 for the year commencing September 1, 20X4. The company initially recorded the $25,500 payment as a prepaid expense.

• At December 31, 20X4, Jassal Music had one Allegro grand piano in its store. Jassal Music will pay Allegro for the piano only when it has a firm sale of the instrument to an external customer. The piano retails on the market for $62,500. The cost of the piano to Jassal Music, which it will pay to Allegro only if it is sold, will be $51,750. In the meantime, as long as the instrument remains on-site at the company’s store, Jassal Music management has decided to record the cost of the instrument in inventory and set up an account payable for the same amount.

• The company has contracts with customers in the school rental program that run for the full academic year (September to June). Customers pay monthly for the instrument rentals. For the academic year of September 20X3 to June 20X4, the rental income earned from the program was $7,000 per month. Six months of rental income from the 20X3-20X4 academic year is recorded by Jassal Music as revenue for its 20X4 fiscal year. The monthly rental income earned by the company on the school rental program for the academic year of September 20X4 to June 20X5 is $8,000 per month. No other rental income was earned by the program in the 20X4 fiscal year.

• During the 2014 fiscal year, Jassal Music sold a violin that would normally sell for $1,650 for a computer system that sells for $1,800. The transaction was recorded as follows:

DR Computer equipment

1,800

CR Revenue

1,650

CR Gain on purchase of equipment

150

DR Cost of goods sold

1,500

CR Inventory

1,500

• Jassal Music records its merchandise inventory into the following four categories: rental instruments and equipment (“Rentals”)

instruments and equipment for sale (“Items”) related products

Allegro instruments (not owned)

The breakdown of inventory held by Jassal Music as at December 31, 20X4, is as follows.

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Module 5.1 — Intermediate Financial Reporting 1 Project 1

Jassal Music

Inventory

December 31, 20X4

Number of

Inventory item

units

Cost per unit

NRV per unit

Rentals

Chime sets

75

$

225

$

79

Cymbals

75

$

15

$

5

Drum sets

50

$

175

$

61

Flutes

75

$

100

$

35

Violins

75

$

110

$

39

Guitars (school program)

120

$

62

$

22

Keyboards

15

$

250

$

88

Recorders (school program)

120

$

7

$

2

Saxophones

20

$

225

$

79

Triangles

80

$

5

$

2

Xylophones

20

$

135

$

47

Instrument stands

250

$

80

$

36

Items for sale

Chime sets

3

$

750

$

790

Cymbals

4

$

70

$

85

Drum sets

3

$

450

$

525

Flutes

5

$

650

$

775

Violins

3

$

1,500

$

1,650

Guitars (school program)

7

$

62

$

45

Guitars — acoustic

9

$

125

$

132

Guitars — electric

12

$

190

$

225

Keyboards

4

$

2,200

$

2,100

Pianos — entry

3

$

2,300

$

2,500

Pianos — introductory

5

$

4,500

$

4,900

Pianos — intermediate

2

$

12,000

$

14,200

Pianos — professional

1

$

22,500

$

25,000

Pianos — upright

2

$

5,000

$

7,500

Recorders (school program)

25

$

7

$

10

Saxophones

3

$

575

$

675

Ukuleles

5

$

55

$

65

Xylophones

4

$

245

$

300

Instrument stands

15

$

80

$

75

Related products

Sheet music (scores)

2,800

$

12

$

18

Bows

25

$

12

$

22

Picks

200

$

2

$

5

Strings (packages)

75

$

12

$

10

Metronomes

25

$

20

$

45

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Module 5.1 — Intermediate Financial Reporting 1 Project 1

Allegro (non-owned)

Grand piano

1

$ 51,750

$ 62,500

• The majority of sales conducted by Jassal Music are in cash; other than the school district, very few customers are offered credit terms. Historically, less than 1% of year-end trade accounts receivable (excluding the school program) is not collected. There have never been any bad debts from the school program. At year end, Jassal Music adjusts the allowance for doubtful accounts to be 1% of the trade receivables, excluding trade receivables from the school program.

• On October 19, 20X3, Jassal Music sold a delivery vehicle that it no longer needed for $6,500. The company took a note receivable from the customer, Ryan Tower Inc., for this sale. The terms of the note state that it must be repaid in full within three years; however, there is no fixed payment schedule. The note also bears interest at 12% per annum, which is equal to the market rate of interest.

Ryan Tower has made the following payments on the note receivable to date:

Date of payment

Total payment

Applied to interest

December 31, 20X3

$

1,500.00

$ 156.00

April 15, 20X4

$

1,000.00

$ 177.99

August 6, 20X4

$

800.00

$ 161.01

The schedule below has not been updated since the December 31, 20X3, payment.

Days

Amount

Interest

Amount

Date

outstanding

outstanding

rate

Interest

Payment

outstanding

October 19, 20X3

$6,500.00

12.00%

$6,500.00

December 31, 20X3

73

$6,500.00

$156.00

$1,500.00

$5,156.00

April 15, 20X4

$5,156.00

$5,156.00

August 6, 20X4

$5,156.00

$5,156.00

December 31, 20X4

$5,156.00

$5,156.00

The payments were applied appropriately, first to interest and then to principal. However, interest income has not been accrued to December 31, 20X4.

Required:

Submit the following:

• A list of the adjusting journal entries with supporting calculations as necessary (25 marks)

• A calculation of inventory at the lower of cost or net realizable value (6 marks)

• An adjusted trial balance (year-end working paper) based on the adjusting journal entries made in requirement 1) (5 marks)

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