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Mary’s Boutique

Your friend’s mother Mary Brooks has opened Mary’s 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 Mary’s boutique. If you think there is missing data or just can’t 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.
Mary’s 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 juncture…you
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 AJE’s at month end. You can either attempt them immediately in
special section for AJE’s or just mark the passage with highlighter and do all
the AJE’s 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
doesn’t 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 34,600


(to record Purchases for year)
Journal entries for Mary’s 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 herself…note that this is only possible
in a corporation)

#6 Dr Rent Expense 4,800


Cr Cash 4,800
(Annual rent)
Journal entries for Mary’s 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 6,340


Cr Cash 6,340
(payment of miscellaneous expense)
Journal entries for Mary’s 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 2,700


Cr Prepaid Supplies 2,700
(to record usage of supplies for the year)
Journal entries for Mary’s 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 10,000
( record bank Loan)
#15 Dr Interest Expense 1,400
Cr Cash 1,400
(interest on bank loan….note that case doesn’t 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
ignored…part of LCM calculation)

#17 Dr Cash 600

Dr Interest Receivable 400

Cr Interest Income Earned 1,000


(to record interest on the savings bond)
#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 28,400


Cr Cash 28,400
(Only one previous entry charging A/P and since we are told
the ending balance…the difference must be payment on
account)
Adjusting Journal Entries for Mary’s 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 240


Cr Prepaid Insurance 240
(to record expiry of half the insurance)
#2 Dr Depreciation Expense 2,000
4
Cr Accumulated Depreciation 2,000
(straight line depreciation on furniture…20,000 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 doesn’t come to this balance then you have
missed something
Note 3: Income tax entry still to do
CASH      

20,000 9,200
20,000 12,000
8,900 4,800
43,400 330
10,000 2,950
600 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 9,200
20,000 12,000
8,900 4,800
43,400 330
10,000 2,950
600 6,340
1,400
10.000
480
20,000
28,400

Balance = 7,000 = We  see  a  480  credit  which  is  the  


bummer…..balance is amount  of  the  difference…if  we  go  
supposed to be 7,480 back  and  read  the  case….Mary  
dumped  this  in  miscellaneous  
expense…  so  we  have  double  counted  
CASH      

20,000 9,200
20,000 12,000
8,900 4,800
43,400 330
10,000 2,950
600 6,340 - 480
1,400
10.000
480
20,000
28,400

Balance now = 7,480 = hip hip In  addiFon  to  reducing  cash  


hurray ! 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  
Mary’s  BouFque  Ltd.  
Income  Statement  
For  the  year  ended  
January  31,2008  
Mary’s  BouFque  Ltd.  
Statement  of  Retained  Earnings  
For  the  Year  Ended  January  31,  2008  
Mary’s  BouFque  Ltd.  
Balance  Sheet  
As  at  January  31,  2008  
Now for the key question: Is Mary’s 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 year…then you have a one way ticket to
oblivion

We need to look at Mary’s 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 don’t 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 volume…she 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 whoever…don’t 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 herself…this is usually the formula
in a new business…60 hour weeks at minimum wage and forget the
family….having an employee is a luxury Mary can not yet afford
Mary’s
Boutique

Rest
In
Peace