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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