ACCT*1240 Final Exam

SEMESTER:  Winter 2023

Come Get Ready With Me

Alex Curl, started “Come Get Ready With Me”, an image consulting business, on January 1, 2022, in Beauty, Ontario.   Alex anticipates that the gross revenue to exceed $30,000 this year, hence they became a HST registrant.  They decided to charge a flat fee of $200 per consultation, which includes HST, instead of charging HST on top of the services.  

Alex’s dream was always to have a full-service image consulting business, including make-up tutorials, fashion consulting, and a small storefront. After having a strong on-line presence and sales, on November 1, 2022 Alex successfully took out a line of credit with a local credit union and opened the doors to “Come Get Ready With Me” storefront.  

After completing the fiscal year, December 31, 2022, the credit union requested a copy of Alex’s first set of annual financial statements.  They have a computer program that will assist with preparing the financial statements, but he needs help recording some of the transactions and the year-end adjusting entries.  You provide Alex with some assistance after their first month of operations; they have returned to ask for some assistance with the year-end adjusting entries and some of the more complex transactions.   They trust that you will make the right decisions based on all of the users’ of the financial statements needs, including determining the appropriate accounting framework, but has asked you to write down all your assumptions and rationalization as you prepare all of the necessary adjusting journal entries so that they know why/how to complete the journal entry in the future.   Alex has recorded all the cash transactions and reconciled his bank account.   They have also provided you with a copy of the current trial balance.

When Alex contacted you, you were excited to take on this role as an accounting advisor again. You agreed to meet with Alex to learn more about how things have changed since your last encounter.  On February 22, 2023 you met with Alex at the office at the back of the new store. A summary of your notes and the trial balance are found in Exhibit 1.   A copy of the trail balance is found in Exhibit 2.

Notes from Your Meeting with Alex (Exhibit 1)

1. Alex personally invested $10,000 to start Come Get Ready with Me.   They didn’t know how to correctly record the cash they transferred from their RRSP so they just recorded it as a loan.  They have no plans to charge the business interest for this investment. 

2. Alex has recorded all the cash transactions and completed the bank reconciled attached Exhibit 3.  

3. In order to promote the business, Alex signed a contract for sponsored ads with Tic Toc and Instagram. The expenditure for advertising is for an advertisement which ran during the months of November 2022, December 2022 and January 2023. Alex felt that it was important to spend this amount of money and "get the word out" as the future benefits of these sponsored ads could last years.

4. For the inside of the store, Alex hired a contractor to complete some renovations to bring the building up to code. They were impressed because the contractor gave them a great discount on the value of the renovations if they paid cash in one lump sum.  In addition, they purchased a laptop and printer for the office.  On November 1, 2022, Alex paid the contractor, purchased the computer, and paid for the remaining items to prepare the store.

** Alex has only recorded the initial purchase transaction.

5. Alex explained that they are not very technology savvy, so they hired a web designer to set up a web page and an online booking system. In this way, members or potential clients could access the ‘members only’ site and book appointments. The cost of setting up the website and the on-line booking system was $900 and $1000 respectively.  

6. Alex decided to sell memberships to the website’s members-only section with special tutorials and opportunities to ask Alex questions anytime (yes, 24-7).  Alex had sold 90 memberships annual memberships for $1000 each (40 in November and 50 in December). The $1000 includes HST.  Per the terms of membership, each new member must pay the upfront $1000 for a non-refundable annual membership. Alex recorded all of the revenue when the payment was received.

7. Alex used an on-line payroll service to pay employees during the year.  They pay all employees an hourly rate. They do not provide additional benefits beyond the required deductions.  They owe employees for one week at year-end. The estimated gross pay for his hourly employees is $1000, which does not include standard vacation pay.  

8. Alex counted the clothing inventory and make-up supplies on December 31, 2022.  The remaining inventory on hand cost $8,000 but some of the products are not selling as well as expected hence the fair market value of $6,000.   The make-up and other supplies on hand were $1,225.

9. The insurance expense related to a two-year policy with coverage beginning November 1, 2022 when the two-year premium was paid in full.

10. Rent expense includes rent for the last 4 months of the five-year lease, plus last month’s rent as a deposit.  The lease term commenced September 1, 2022.

11. Before opening ‘Come Get Ready With Me’, Alex had grown a substantial on-line presence, with over 2 million followers on both Instagram and Tic Toc.  Alex had an offer to sell the platform, including the followers, for $200,000.  As such, they recorded that $200,000 as an additional capital contribution on November 1, 2022 when they started the business.

12. Alex estimated that David Dobrik would only pay 20% of his $1200 account balance – 80% of the balance is uncollectable.   Alex believes that all of the other clients will pay 100% of their balances.

13. On December 31, Alex had one of their best customers give Alex a $3000 non-refundable deposit for future services.  The $2000 includes HST.  Alex did not know how to record the amount so they just recorded the full $2000 as a dr to cash and cr to revenue.

14. Alex provided consulting services for five clients December 26 and December 31 but had not yet billed for these services.  They charge $200 per consultation, which includes HST.   

15. Alex decided to create a customer rewards program.  Every time a customer makes a purchase, they receive a point for every dollar spent.  Once they have accumulated 100 points, they can redeem them for a $10 coupon to use towards their next purchase.  Alex automatically enrolls each customer in the customer database so that they can track rewards, and she can also use that information to send out promotions.

16. A club member fell in the icy parking lot and sued the Alex and the business.  The plaintiff is seeking $20,000 in damages.  Alex’s lawyer advises that the lawsuit has a 45-55% probability of success and that, if successful, the plaintiff will be awarded between $10,000 to $20,000.