Question

Algonquin Outfitters

Background

You are an Analyst for the professional service firm, BUSI 1043 LLP. Your firm specializes in providing a wide variety of internal business solutions for different clients. Since you enjoyed your time in Muskoka compiling the Financial Statements for Henrietta’s Pine Bakery, the Senior Manager from your previous engagement gave you another northern Ontario client, Algonquin Outfitters.

Additional Information

Algonquin Outfitters follows the Accounting Standards for Private Enterprises. Despite its revenues, AO operates with few administrative staff, currently employing 12 individuals in addition to the owner, who is there every day.

The owner is considering expanding his operations into the Haliburton Highlands. In order to do so he will have to look into financing options. He is contemplating two debt options: traditional bank financing, or bonds. He is also considering selling some of his common shares to five of his friends and relatives. He is unsure of how these options would impact him and the current organization of his company.

In December of this year, one of AO’s trucks carrying bike and ski lubrication was in an accident. The substance spilled into a local river, contaminating the water supply. AO’s layers have stated that the local residents have filed a lawsuit for $2 million. They expect that AO will be found guilty but the settlement will be between $1.0 million and $1.8 million. AO has let its insurance policy expire and therefore does not have any coverage.

On December 31, four of AO’s trucks were loaded with customer freight and sitting at AO’s loading docks. The goods were delivered to the customers on January 5^th and 6^th respectively. The revenue of $80,000 was recorded in the books on December 31^st.

The owner knows about the importance of internal controls but believes he needs a refresher. He had an individual from purchasing leave earlier this year and is now using the accounts payable person who also prepares the cheques to take care of all purchases. He is beginning to think that this is a good idea as it would save one salary. On the other hand, he does want to maintain controls and is interested in eliminating all potential problems. He would like your recommendations about how he should deal with this.

AO purchased equipment on January 1 five years ago for $80,000 and estimated an $8,000 salvage value at the end of the equipment’s 10-year useful life. On March 31^st of this year, the equipment was sold for $21,000. The last entry to record depreciation was at December 21^st of the prior year. No entries for the sale have been made yet.

The year end for AO is December 31^st. It is now April 20^th and you have been asked to provide a memo to your Senior Manager that can be used as the basis for discussion with the owner that addresses the issues that concern you and the owner. You must address all of the issues in depth and provide recommendations on how to account for them.

Required

write an introduction about your role (the analysist) in the previous cenario

Answer 1

Solution:

?In these problems there are 4 different type of situations.

1) Company’s expansion and raising its capital through various sources

2) Lawsuit against company due to road accident issue

3) Cost cutting and internal control

4) Accounting treatment of sale of equipment

Case 1. Algonquin is Outfitters is private enterprises working with the help of only 12 persons by the owner. These all are administrative staff. Due to expansion the business into highland, the company defintly require to raise its capital. AO is a private company so no doubts it can be raise capital by issuing its share, debentures, bonds to relative, friends and other close subordinates etc.

?As per the information, first company has to issue its share to friends. Now only share can’t fulfill the requirement, so its also require to raise capital by issuing bonds or taking loan from finance companies or banks. In both case company has to pay rate of interest to third party, but rate of interest of private loan is always higher than issuing bonds. Long term loans also require securities of fixed asset/s which is beneficial for Ltd or big Pvt Company. So It is better that, AO is prefer to issue first bond to raise the capital.

Case 2. While in transportation supplier is responsible for the goods in transit. Local river spoiled due to mixing lubricant oil in it, so the resident people naturally filed case of negligence of social responsibility by the AO enterprise, but whatever happen in the transit it can not be say that the company is totally responsible for these issue. Accident is the man made disaster but know one can aware about that. So company not totally guilty for the issue. So the amount of claim is to high. On other side insurance policy is expired so only company also responsible for this issue.

Case 3. In this situation, if internal control system is strengthen the effective and regularity in working can be easily followed by the employees. Owner of the company is also aware about importance of internal control. The enterprise running with the help of only 12 employees and out of these one person from purchasing leave the job also. That is other thing that, the person working in account department is currently handling the situation safetly, but its can not happen for a long time because, from purchasing to payment to party have lot of process which require man power. On the other side, enterprise is also raising its business, so cost cutting in working will be complex and company needs to recruitment for effeicent working.

Case 4. Company purchased the equipment 5 years ago. Its purchase value is 80000, salvage vale is 8000 and estimated life is 10 years. If we assume to SLM for depreciation. The depreciation is required per year is

80000-8000/10= 7200 per year.

Now after 5 year the salvable value of equipement is –

72000 - (7200*5) =  36000 . last entry of depreciation is on 21stDec, its before 1 month earlier from year ending. Still company take burden of loss on sale of equipment by value of 15000.

There is no entry after depreciation so, it is clear that, there are frauds or misuse of the asset in total transaction of these equipment. It is required that, to give memo the responsible persons are involve in these total transaction.