You are on page 1of 22

Marys Boutique

Your friends mother Mary Brooks has opened Marys Boutique Ltd. in
a nearby shopping mall. She began her business on February 1, Year
2007. She invested on that day $20,000 in share capital and her
husband Tom contributed another $20,000 as a loan to the firm. The loan
bears interest at 10% per annum and none has been paid to date.
Mary found the business exciting and she seems to have been
successful as a business person but the question is how successful?
She has no formal training as an accountant but does keep a summary
of selected transactions for the fiscal year ended JANUARY 31, YEAR
2008.
Cost of merchandise purchases on account$34,600
Wages paid to assistant..$9,200
Salary paid to herself..$12,000
Rent paid..$4,800
Business taxes & licenses..$330
Supplies purchased for cash.$2,950
Miscellaneous expenses paid..$6,340

During the year the boutique sold merchandise for $57,600 of which
$8,900 was for cash and she collected all credit sales made except for
$5,300. However, Mary expected to eventually only collect $4,100 from
these outstanding receivables.
Mary had recorded the cost of each item sold during the year and this
totaled $24,800. The cost of the merchandise still on hand was $8,700
which leaves $1,100 of purchases unaccounted for (probably shoplifters).
At January 31 2008 she estimated supplies on hand had a cost of $250
The bank had deducted interest and bank charges totaling $1,400 from the
boutique bank account. The major portion of this was for interest on the
demand loan from the bank which has a principal amount of $10,000. This
loan is fully secured by a government savings bond that Mary purchased
for $10,000 for the firm when she first opened for business. The current
market value of this investment is $10,200. The boutique had received
$600 interest on this investment and another $400 had been earned but
not accrued at year end. The bank balance at January 31, 2008 shows as
$7,480

When the business was formed, a friendly insurance agent sold her a two
year business insurance policy with a premium of $480 for the two years.
She paid cash for the policy and included the bill in her miscellaneous
expenses. When she moved into the store she paid the previous occupant
$20,000 for the existing furniture and fixtures which she estimated would last
her easily another ten years. Mary maintains excellent relations with her
suppliers and has never had a dispute of any kind. She currently owes them
$6,200. Since the business is incorporated it has to pay income taxes to
Revenue Canada. She qualifies for the small business tax rate of 20%
REQUIRED:
Prepare a set of financial statements in good form to show the results of year
1 for Marys boutique. If you think there is missing data or just cant come
up with the required amount, then explicitly say so and use the notation let
the missing number be X so you can continue to draft your statements. If
you think that for some reason that an assumption is called for, then also
state it clearly on your exam paper.
2) Conclude whether you think Mary will have a successful career as a
boutique operator.

Marys Boutique
Approach.this case is actually highly directive asks for set of financials
therefore..journalize the transactions and post to T accounts. A hot shot might
try to skip journal entries or even skip the T accounts but at this junctureyou
should start with baby steps and take the low risk , albeit slower approach.
However, by exam time you have to be a hotshot.it is too time consuming to
do journal entries so make entries in T accounts directly on exams.
Note on procedure..we normally process transactions sequentially as we
encounter them in a case if it is an easy one. An easy one lists will provide you
the data in chronological order. Sometimes you read information that you know
will trigger AJEs at month end. You can either attempt them immediately in
special section for AJEs or just mark the passage with highlighter and do all
the AJEs together at year end.note also that this case does not require
monthly financials.
Note 2 on Procedure..it makes a difference whether financials are being
asked for in good form or just as a conduit to making some decision. Good
format statements take 3 times longer so go for speed here

#1

Dr Cash

20,000

Cr Common Shares

20,000

(Start business by depositing cash for shares)

#2

Dr Cash

20,000

Cr Long Term Loan Payable

20,000

(to record loan from Tom which bears interest at 10%.....case


doesnt mention short term or long term and we will have to
classify it for the B/S but sounds like it is being used as long
term capital. AJE will be needed for interest)

#3

Dr Purchases

34,600

Cr Accounts Payable
(to record Purchases for year)

34,600

Journal entries for Marys Boutique


#4

Dr Wages & Salary Expense

9,200

Cr Cash

9,200
(annual wages to employee)

#5

Dr Wages & Salary Expense

12,000

Cr Cash

12,000

(annual wages to herselfnote that this is only possible


in a corporation)

#6

Dr Rent Expense

4,800

Cr Cash

4,800
(Annual rent)

Journal entries for Marys Boutique


#7

Dr Business taxes & Licenses Expense

330

Cr Cash

330
(business taxes for the year)

#8

Dr Prepaid Supplies

2,950

Cr Cash

2,950

(purchase of supplies .. will require AJE)

#9

Dr Miscellaneous Expense
Cr Cash
(payment of miscellaneous expense)

6,340
6,340

Journal entries for Marys Boutique


#10

Dr Accounts Receivable

48,700

Dr Cash

8,900

Cr Sales

57,600
(to record sales for the year)

#11

Dr Cash

43,400

Cr Accounts Receivable

43,400

(to record collections on account AJE required for


bad debts)

#12

Dr Supplies Expense
Cr Prepaid Supplies
(to record usage of supplies for the year)

2,700
2,700

Journal entries for Marys Boutique


#13

Dr Inventory

8,700

Dr Cost of Sales

24,800

Dr Cost of Sales

1,100

Cr Purchases

34,600

(Since the case uses the term purchases and makes no


mention of perpetual system we assume periodic system.
This entry is standard procedure for recording cost of sales
and setting up balance sheet inventory. Also standard
procedure to bury minor inventory shortages in C of S . ...
large write downs might get separate disclosure)
#14

Dr Cash

10,000

Cr Bank Loan Payable


( record bank Loan)

10,000

#15

Dr Interest Expense

1,400

Cr Cash

1,400

(interest on bank loan.note that case doesnt mention any dates


so we cant be sure if accrued right up to 1/31.but with no info no
entry)

#16

Dr Long Term Investments

10,000

Cr Cash

10,000

(Another ambiguity of the case.we need to know whether short


or long term for B/S classification. We assume short term also
you will lean in Module 7 that the $10,200 market value is
ignoredpart of LCM calculation)
#17

Dr Cash

600

Dr Interest Receivable

400

Cr Interest Income Earned


(to record interest on the savings bond)

1,000

#18

Dr Prepaid Insurance

480

Cr Cash

480

(purchase of 2 year insurance policy..two things to watch out


for.AJE at year end to recognize expense..curious phrase
in case..included this in miscellaneous expense.will have
to be on lookout for error)

#19

Dr Furniture & Fixtures

20,000

Cr cash

20,000

(Purchase of furniture.note that depreciation will be required


as AJE)

#20

Dr Accounts Payable
Cr Cash
(Only one previous entry charging A/P and since we are told
the ending balancethe difference must be payment on
account)

28,400
28,400

Adjusting Journal Entries for Marys Boutique


#21

Dr Interest Expense

2,000

Cr Interest Payable

2,000

(set up accrued interest on the loan to Tom)

#22

Dr Bad Debt Expense

1,200

Cr Accounts Receivable

1,200

(writing off uncollectible accounts)

#23

Dr Insurance Expense
Cr Prepaid Insurance
(to record expiry of half the insurance)

240
240

#2
4

Dr Depreciation Expense
Cr Accumulated Depreciation
(straight line depreciation on furniture20,000 over ten
years)
Note: We can now post to the T accounts and take a trial
balance to ensure we made no errors.

Note 2: that we were given the ending cash balance of


$7,480 so this represents an ideal check on your work. If
your T account doesnt come to this balance then you have
missed something
Note 3: Income tax entry still to do

2,000
2,000

CASH

20,000
20,000
8,900
43,400
10,000
600

9,200
12,000
4,800
330
2,950
6,340
1,400
10.000
480
20,000
28,400

Balance = 7,000 =
bummer..balance is
supposed to be 7,480

CASH

20,000
20,000
8,900
43,400
10,000
600

9,200
12,000
4,800
330
2,950
6,340
1,400
10.000
480
20,000
28,400

Balance = 7,000 =
bummer..balance is
supposed to be 7,480

We see a 480 credit which is the


amount of the dierenceif we go
back and read the case.Mary
dumped this in miscellaneous
expense so we have double counted

CASH

20,000
20,000
8,900
43,400
10,000
600

9,200
12,000
4,800
330
2,950
6,340 - 480
1,400
10.000
480
20,000
28,400

Balance now = 7,480 = hip hip


hurray !

In addiFon to reducing cash


disbursements by 480, we also need to
drop Miscellaneous Expense by this
amount since it should have properly
been set up as a prepaid expense

Marys BouFque Ltd.


Income Statement
For the year ended
January 31,2008

Note that this income statement is


in draft format for the purpose of
calculating the bottom line but is
not considered to be good format
for external publishing. The
heading, underscores and $ signs
are absent. Also, in strict GAAP
interest revenue and expense are
typically separated from other
items and shown near the bottom
of the statement. The other
financial statements are also only
in draft format

Marys BouFque Ltd.


Statement of Retained Earnings
For the Year Ended January 31, 2008

Note that a debit balance in Retained Earnings is properly referred to as a deficit. There are certain legal
implications for a company with a deficit but this is a topic for later modules. Also note that the word deficit
has a different meaning in government accounting. In that context it refers to the current period excess of
expenditures over revenues. The accumulated government deficits of several years is referred to as the
national debt. For instance in 2011 the federal deficit is expected to be about $45 Billion but the National
Debt is about $900 Billion. In the USA the deficit is about $1 trillion each year but the national debt is too
many zeros to fit in a calculator. if you follow the news closely you will note that the USA is near
bankruptcy and has to pass special borrowing acts each year just to prevent the government from
shutting down. Thank your lucky stars you live in Canada.

Marys BouFque Ltd.


Balance Sheet
As at January 31, 2008

Now for the key question:

Is Marys business a success or failure???

Net Income is negative .. a $9,200 loss..You can have a loss for a year or
so, but if that is the pattern year after yearthen you have a one way ticket to
oblivion
We need to look at Marys revenues and expenses to see if anything is
extraordinary. i.e., not likely to repeat in future years (remember the discussion
of normalized income in Demarco and Jesse?) Unfortunately, we dont see
anything so if year 2 and 3 are a repeat she is doomed to failure.
At this point Mary has to sit down and think.how can I raise revenues or cut
costs next year? You raise revenues by either increasing mark-up or by
increasing volumeshe needs to rethink her sales strategy
There is one major cost cut she can achieve if she wanted to make the F/S look
good to show to a bank or whoeverdont take a salary until things improve if
she can live off personal savings.$12,000 less expense or go with plan B
fire the assistant ($9,200) and work long hours herselfthis is usually the formula
in a new business60 hour weeks at minimum wage and forget the
family.having an employee is a luxury Mary can not yet afford

Marys
Boutique

Rest
In
Peace