Case Study – Rhy’s Fries: Part 1 & 2

Case Study – Rhy’s Fri

Part 1

May 1, 20X1

Ronald Rhy is the head fry cook and bottle washer at a local chain restaurant. Although his choice of career hasn’t been the most financially rewarding he has always had a passion for providing great food to customers. His specialty dish is the triple fried Belgian style fries with his secret seasonings. Lately the tedium of his position is starting to wear on him and he finds himself thinking about leaving the organization to start his own business. He even has a name picked out; Rhy’s Fries. He is hesitant to take the plunge and leave the security of his current job but a recent advertisment he saw about an upcoming event; The LadLard Food Fair has him very intrigued. He feels this is could be an excellent way to see if venturing out on his own can work.

The LadLard Food Fair is a two day convention that takes place May 29 and 30, 20X1. The event allows deep fry masters to showcase their skills and sell food to swarms of hungry customers. For a one time fee, vendors get access to a booth and are provided with cooking oil, disposable plates and cutlery for patrons. The food or any other products they wish to sell are not provided. Vendors can bring in their own equipment or rent a deep fryer for an additonal fee.

The fee for the convention is $2,000 plus an additional $400 for the deep fryer rental but Ronald is currently short on cash. He is able to put $2,500 of his own cash into the business but will have to borrow the remainder from a family member. He also will have to borrow money to buy the potatoes he needs for his fries. Ronald is unsure how big this event will be but estimates that he will need 45 bags of potatoes (each bag costs $50). To cover off these costs as well as have a small contingency fund he will need to borrow $4,800 from his family.

Ronald approached his uncle Bob for a loan as well as some advice as Bob is a CPA and has been running a successful accounting firm for many years. Bob provides the $4,800 loan to Ronald and provides some free accounting advice; Keep all your receipts and keep track of everything because this is now a business. Bob also tells Ronald to register the business as a corporation, as it can help limit the personal liability in case something happens. Ronald takes the loan from Bob, immediately pays the fees (entrance and deep fryer) and then buys the potatoes he needs. He also went to city hall and registered his business as Rhy’s Fries Inc. a private corporation where he is the primary shareholder. The business registration cost $250 and he’s declared that the fiscal year for this organization will run from May 1^st to April 30^th.

1a) Complete any journal entries required for Rhy’s Fries up to this point. Assume inventory is FIFO costing under a perpetual inventory system.

1b) Create T-accounts for the accounts used and show the ending balance of each account after journalizing the transactions from (1a) above.

Rhy’s Fries – Part 2

May 31, 20X1

The convention was a huge success! Ronald’s booth was extremely popular and drew attention from local media and food bloggers. This unexpected boost provided a near non stop flow of customers to his booth. It was hard work but it paid off.

At the end of the convention, Ronald added up all of his sales tickets and was pleased with the results. He had total cash receipts of $9,450 (this included GST on the sales of $450) but he didn’t read all of the fine print in the convention contract he signed. He found out at the end of the event that there was a cleanup and oil disposal fee charged for every barrel of oil used. The fee was $100 (plus GST) per barrel and Ronald used 5 barrels of oil over the course of the weekend.  He used the cash he generated from sales to pay the cleanup fee at the end of the convention. He also had 7 bags of potatoes left that he is going to keep in storage.

2.) Complete any journal entries required for these events?

Hint: It may be a good idea to keep updating the T-accounts for the accounts used.