Starting an Organic Store in Georgetown - Business Transactions

Samson McNaught, a final year student who just finished all the exams from Seneca College this year, he has put in a lot of effort in pursuing his Honours Bachelor of Commerce degree - International Accounting and Finance and expected to graduate with honours. Samson thought he would not have finished his study without the assistance from the professors, he visited the professors and said goodbye to them. Samson was planning to look for a summer part-time job so that he could enjoy his long-awaited summer break before he started pursuing his CPA designation. As soon as Samson went home, he sent his resume to the Accounting firms applying for summer job in his home town, Georgetown. He was not able to obtain a job that he wants as he prefers working as an accounting-related jobs as he had experience working in an Accounting firm in the co-op program offered by the college. Samson waited for about two weeks but he still received no reply from the employers, he then walked around the Main Street to see if there are any business opportunities. It was a Sunday when he walked around with a very nice weather, everyone in the town went out to have a walk as there is a flea market. He ran into his childhood friend, Angel, who was selling her organic body care products in the flea market. Angel told him that he is lucky to be in town this week as the flea market got cancelled twice due to the weather condition. She told Samson that people nowadays prefer organic products, especially for body care products. Samson then asked if Angel is interested to partner with him and start up their business. As Angel studied Biochemistry in college and she did not have any accounting or business background, Samson agreed to be responsible for maintaining the financial records of the business. Georgetown attract tourists during weekend as it is close to different hiking trials, most of the tourist travel to Georgetown after they have done hiking in the morning. Once Samson and Angel started to develop their business plan, they walked around the Main street to see what the stores are selling. They found that no store is selling organic products and hence they have decided to rent a retail store in Main street. Samson sought help from his friend who is a real estate agent to look for a retail store, his friend brought them to visit different stores and they finally confirmed to rent a corner of a retail shop in order to minimize their start-up cost. They then started planning the details of opening up their business. Samson and Angel had a meeting and they come up with the following: • Samson and Angel contribute $5,000 each into the business, and the name of the business is S&A Organic Store (SAOS) • SAOS pays rent of $500 per month before the start of each month for the next month to the landlord. The rent included a small supply room for storage and to place the equipment to manufacture their products. • A fee of 4% of monthly gross sales will be paid to the landlord for electricity, water and internet. This is to be paid on the first day of the month on last month’s sales. • Samson and Angel agreed to use a periodic inventory system. Angel will count the inventory at the end of the period. Samson will be responsible for maintaining the financial records of the business. • They solicited a deal with the supplier, Organic Wholesaler, with payment terms n/10. • SAOS had its grand opening in May 1 but Samson and Angel started to prepare for the opening starting the last week of April. The transactions of April and May is listed below: April 22-29, 2018 • Ordered three signs from Famous Sign Company for the business, one to be placed over the counter that has the price list, a board sign will be placed outside when the store is open for business, the other to be placed on the outside of the building, these signs will be used all year round. Purchase price of all signs $990.00. The signs will last three years before needing replacement. To be paid in full upon Delivery. • Conducted interviews and hire students that will make $15.00 per hour, an assistant manager will make $19.00 an hour to work when Angel is not working. Since the students will be working less than 20 hours per week withhold taxes and other source deductions do not apply. SAOS will be open seven days a week from May 1st to October 30th, payroll wage cost will be $475.00 per day from May 1st to September 6th. After September 6th the store will require only one person to operate and two people on the weekends. All students hired will start working May 1st. The employer will be paying 14% in benefits for each employee of their gross wage. These Benefits are payable 45 days after date on pay cheque. The employees first pay cheque will be dated May 14th for the first week of work (7 days) and every two weeks after that. May 1, 2018 • Opened a Bank account for the business and placed the $10,000 (contribution from Samson and Angel) in the account. While at the bank, Samson negotiated for the use of Credit card device and processing, once the credit card sales are deposited to the bank, they will charge 4% per transaction. The bank also offered a $15,000 Line of Credit at 6% if the business needed it. • Wrote cheque to paid landlord the first month and last month’s rent. As per the agreement last month. • Famous Sign Company delivered the sign, as per agreement it was paid in cash. May 2, 2018 • Ordered and received 16 bottles of Organic Body Lotion @$38.00 each, 800 Organic Candy @$0.25 each, 600 Organic Chocolate @$0.70 each, 500 Organic Snacks @$0.08 each, Organic Hand Lotion 3 bottles @$27.00, from Organic Wholesaler. • Purchased and paid by cheque a used cash register (four years old) for $1,440. When new the cost price was $8,400 with expected life of 10 years, the cash register is estimated to have a 6 year life. • Angel needed a computer for the business, so she gave the business her computer, monitor, and colour printer, when she purchased it August 2, 2017 at Staple’s Back to School sale the package was on sale for $1,500 regular price was $2,100. The salesperson said the new computer, monitor, and printer would last 5 years when it was purchased. May 3, 2018 • Paid by cheque $158.00 to Staples for office supplies – 1,000 sheets paper for $10.00, six printer toners for $130.00, 6 rolls of paper for cash register $6.00 and assorted office supplies of pens, pencils, paper clips, and post-it-notes for $12.00. May 4, 2018 • Angel printed from her printer 500 flyers to advertise SAOS with its hours of operations for May and June. She used paper acquired at Staples for $5.00 and three color cartages for $65.00. All of the toner and paper was used for the printing. • Purchased, paid by cheque, and received an additional freezer to store extra products $4,800, expected to last 10 years. • Purchased advance advertising totaling $1,080 for twice a month ad placement in Muskoka Regional newspaper for six months $90 per issue. First newspaper ad to appear May 14th. ? May 5, 2018 • Business insurance for six months Prepaid $1,800 • Cellphone $75.00 per month and paid two months in advance, this package included all long-distance calls in Canada and unlimited day and night calling, and 6G data. The cell phons is use for business purpose. May 10, 2018 • Ordered and received 18 bottles of Organic Body Lotion @$38.00 each, 950 Organic Candy @$0.25 each, 700 Organic Chocolate @$0.70 each, 400 Organic Snacks @$0.08 each, Organic Hand Lotion 4 bottles @$27.00, from Organic Wholesaler. May 12, 2018 • Paid for the first shipment. • First week cash sales $1,012.00 and $2,213.00 credit card sales. May 14, 2018 • Paid employees for the first week plus benefits,7 days of pay • Second week cash sales $6,801.00 and $10,621.00 in credit card sales. • Ordered and received 18 bottles of Organic Body Lotion @$38.00 each, 950 Organic Candy @$0.25 each, 700 Organic Chocolate @$0.70 each, 400 Organic Snacks @$0.08 each, Organic Hand Lotion 4 bottles @$27.00, from Organic Wholesaler. • Third Week Sales – cash $15,234.50 and $20,387.50 in credit card sales. May 20, 2018 • Paid for the second shipment. • Ordered and received 20 bottles of Organic Body Lotion @$38.00 each, 9500 Organic Candy @$0.25 each, 800 Organic Chocolate @$0.70 each, 400 Organic Snacks @$0.08 each, Organic Hand Lotion 4 bottles @$27.00, from Organic Wholesaler. May 24 2018 • Paid for the third shipment. May 25, 2018 • Ordered and received 20 bottles of Organic Body Lotion @$38.00 each, 950 Organic Candy @$0.25 each, 800 Organic Chocolate @$0.70 each, 300 Organic Snacks @$0.08 each, Organic Hand Lotion 4 bottles @$27.00, from Organic Wholesaler. May 28, 2018 • Paid employees for two weeks plus benefits, 14 days of pay. May 30 2018 • Paid for the fourth shipment. • Angel took $4,000 out of the business to pay her first installment of her student loan. May 31 2018 • Week four sales to the end of the month – Cash $19,987.00 and $18,745.00 in credit card sales. • The last week was very busy, no one had time to sit down. At the end of the day Angel noticed that the freezers in the front of the store were close to empty so she went to the supply room and was shocked. The room and freezer were empty except for a handful of sample spoons – no one informed her that to order more products. She looked at the inventory sign out sheet – no one stole the supplies, there was a “post it note” on the sheet that said “we need to order more”. She then ordered supplies for delivery on June 1st , Ordered and received 16 bottles of Organic Body Lotion @$38.00 each, 800 Organic Candy @$0.25 each, 600 Organic Chocolate @$0.70 each, 500 Organic Snacks @$0.08 each, Organic Hand Lotion 3 bottles @$27.00, from Organic Wholesaler. • Calculated rental fee of 4% of monthly gross sales to the landlord for second part of rental agreement. • Inventory of Office Supplies left on hand $44.00. • Inventory on hand amounts to $500 ? REQUIREMENTS: Part A  Samson would like to explain the benefits of incorporating the business to Angel. Please apply the case information and provide your explanation to her. part B1. Journalize the transactions, including the adjusting entries and the entry to set up the cost of goods sold at the year end. 2. Prepare the following: a. Trial Balance as at May 31, 2018 b. Income Statement for the month ended May 31, 2018 c. Statement of Changes in Shareholders’ Equity for the month ended May 31, 2018 d. Classified Statement of Financial Position (Balance Sheet) as at May 31, 2018 Part C Samson got a job offer in an Accounting firm starting June 1; Angel agreed to run the business on her own while Samson remains his ownership in the business. At the end of June, Angel told Samson the following and ask for Samson’s recommendation to enhance the internal control. • Angel keeps $5,000 in the cash register overnight as she believes that the chance of burglary is low. The cash register is located near the window that can be broken easily. • When the part-time cashier is handing over the cash register to Angel, she did not reconcile the amount of cash in the register with the receipts. She believes that the part-time cashier is honest and faithful. • Angel did not prepare bank reconciliation during June. Instead she wanted to wait until the year end as she will be less busy at that time. There were few transactions that Angel recorded but she could not locate the invoice. State the implication of each internal control issue and provide your recommendation.