Case Study:
Briana Hope has had a long-standing love affair with technology and an appetite for apps. She believes that business owners that are not taking advantage of apps to reach customers through their smartphones are missing out on a golden opportunity. If you own a smartphone or tablet, you are familiar with apps, whether you are checking the weather forecast, the latest stocks reports or playing the Angry Birds game. Many are convinced that this is how to communicate with the next generation. Apps are very powerful tools. People even take their smartphones to the washroom, as they used to do with newspapers or magazines. There's a decline of people going on computers. They are referring more and more to mobile media for their information sources. This is especially true for people under 40, and anyone who wants to attract that demographic. Briana says to her clients that if you own a business, having your own app can help market your company and build a customer base. The sky's the limit when it comes to develop apps. For example, someone could scan your QR code (similar to a bar code) from a sign in the window of your store front, from your business card or marketing material and be linked to your app, which could contain a catalogue of your products and prices, details of any specials and offer discounts for sharing the app. You may not need a retail space at all; you can use an app to build a virtual business. With an app you have a blank canvas and you can design what you like and pull bits from your website, Facebook, Twitter and You Tube. You build your own little community. You can use it to promote your products, services and events. Briana, a BAS graduate, has more than 10 years of internet technology experience. In the year 2000 opened one of the first virtual accounting practices in Canada and in 2013 is launching DIYAppsStore Canada, an innovative app-maker platform for small businesses. The company will have the head office in Port Perry. Her experience during 2012 showed that people in different lines of work had used her apps. Models can set up an app to display their portfolios. Musicians can use it to sell their music, inform fans of upcoming concerts and sell tickets. People with an interest in genealogy can use an app to build the family tree. It is not only business that can benefit from apps. One of Briana's apps was to support a wedding. Her client sent out invitations, accepted RSVPs, set up a gift registry and included stories on each person in 3 the wedding party. Many of her current clients are churches, who use apps to attract young people. There's also a private school that plans to use apps to deliver homework assignments to its students. ONGs are heavy users of apps as well; and conference organizers are turning into apps to make available the welcome message, dinner booking, conference agenda, seminars, floor maps and speakers bios. Briana had $30,000 in accumulated savings and also her husband can loan her an equivalent amount if she needed start-up capital. In January of 2013 she contacted a lawyer for advice about the legal form to give to her new business. The legal firm Port Hope Law provided the necessary legal advice and did all the necessary paper work to incorporate 1 as a Canada Business Corporation. Initial capitalization allowed for 20,000 par value shares. Briana, her lawyer and her husband were named as Directors of the Corporation which was called DIYAppsStore Canada Ltd. The lawyers also checked that the name was not already registered .Briana contributed $10,000 in exchange for 5,000 of the shares. This was deposited into a new corporate bank account she set up with TD Canada Trust on January 10, 2013. She also talked her husband into investing $5,000 in exchange for 2,500 shares. The bank account was a standard commercial chequing account that gave cheques returned with monthly statements for a fee of $50/month. The January statement is included. Although Briana knew that there was no need to have a formal office, she decided to lease a small office in a boutique mall in the Bloor and Bay area in Toronto in order to gain some visibility in the first months of operations. She signed a 6 month lease on January 10 for $1,000/month plus HST (Ontario rate = 13%). As an inducement to sign the lease the January rent was reduced to $500 plus HST, but she did have to provide a security deposit of $2,000 (HST exempt). The deposit would be returned at such time that the lease ended if there was no damage and she was to receive 6% simple interest on the amount which would be paid to her with the returned principal. She decided to treat the deposit as a miscellaneous receivable. She went next to Staples Business depot and was able to acquire all the necessary office furniture, computing and telecommunication equipment that she did not have already in her home office. For accounting purposes all office equipment would be depreciated in five years with no residual value and all computers and telecommunications equipment (including her cell phone) will be depreciated in two years). Briana will continue to have part of her operations in the office already set up in her house of Port Perry, however 1 Hint: start up costs can be capitalized as an intangible asset "Organization Costs" and are assumed to have an indefinite life for amortization purposes. You may want to read the segment in Module 10 on intangibles for further clarification. Internet domain names would be afforded similar treatment. since that equipment now will be used for the newly established company, in the books has to be reflected her capital contribution with office equipment for a value of $2,000 and computers and telecoms for $3,000. Next step for Briana was to clearly state the pricing for the diverse services. 1) Minimum of $2,000 to develop a custom app, including consulting, setup and design. 2) $50 per month for a do-it-yourself package for small-business owners that includes consulting and trouble shooting on a 24/7 basis (terms of the contracts vary but 6 months is the minimum). Briana knows that both services are subject to HST, and that DIYAppsStore Canada Ltd. as a GST/HST registrant has an annual reporting period as it is the one that requires the least frequent filing of GST/HST returns available for her threshold amount (annual sales of less than $1,500,000). DIYAppsStore Canada Ltd. has a December 31 fiscal year-end, therefore the due date of income her tax return is June 15 of the subsequent year. However, any HST owed is payable by April 30 of the subsequent year. This payment is to be reported on line 110 of the income tax return. Briana knew that in order to develop simultaneous custom made apps she will need to rely on programmers that will be called upon need and will be paid per on a per output basis. Based on prior experience and the lawyer's advice, these people were deemed casual labour instead of employees but to have that status they are not allowed to work more than 15 hours per week. Briana felt quite comfortable running her own website that was designed during 2012 and has ever since suffered constant updates. She knew that if the website development was contracted out, it could be treated as another organizational cost, so she decided to buy it from Briana Hope for $1,800 and amortize it in one full year. Briana doubted if she was supposed to expense this $1,800 immediately but since her expenses were going to be so high in relation to revenues in the start up year, she felt that her actions were justifiable. In terms of setting up her accounting system Briana decided on the following records: ? Chart of Accounts ? General Journal used for all adjusting and oddball entries ? Sales Journal ? Disbursements Journal Sales were of two kinds: one time only for special apps or regular payments from customers using her services. Revenues were recognized when the special app was delivered to the client and at month end for clients in long term contracts. Most of the clients paid via credit card. Briana only accepts VISA that charged 3% of sales receipts for its processing services. For those clients paying in cash, for simplicity, Briana recorded those sales when she made the bank deposit of the cash payments in her bank account. Occasionally clients for special apps would not show up at delivery but show up later with plausible sob stories. Briana would take their money for a new updated app adding a $100 processing fee to the new billing. Briana of course had other business expenses that were normal for the business and these are reflected in the cash disbursements journal. By January 31st she had received $2,550 from Pet Smart, but the app will be delivered by the end of the first week of February if all the pending issues are solved by the developer. At the end of her first month of operations she decided to prepare a complete set of financial statements (January 31st , 2013, Balance Sheet, Income Statement and Statement of Retained Earnings... but no Cash Flow Statement). She plans to do the same at the end of February to compare the performance in both periods. One event happened near the end of January that left Briana distressed. She had just received a letter from a lawyer stating that a lawsuit had been launched against her company for recovery of fees and huge sums in punitive damages A clients that got a special app for her wedding says that a breach in security in the app allowed her future husband to read the profile and data uploaded by a former boyfriend and as a result of it the wedding has been cancelled. On consultation with Port Hope Law, she was advised that the suit would probably proceed but at this point in time it is not clear for how much a settlement could be achieved. A financial statement footnote would be appropriate, however, until such time as a court decision was reached. Port Hope Law did inform her that the minimum legal fee for her defense would be $2,000 but a billing would not be prepared until the expected court date in April. A five cent per share dividend was declared on January 31.
REQUIRED:
Prepare the accounting records for Tanya's Tutoring Service (Version A)
1. Set up the Chart of Accounts
2. Prepare the bank reconciliation for January 31, 2013
3. Prepare the General Journal for the month of January 2013
4. Post all transactions to the T-accounts
5. Prepare a trial balance for the month of January 2013
6. Prepare the Financial Statements in good form for the month of January 2013 including footnotes for a Summary of Significant Accounting Policies and for contingency disclosures.
7. Special instructions:
- Each General Journal entry should have an explanation under it in parenthesis.
- Every place where the word "Briana" appears in items 1, 2, 3 and 4 of the required substitute your own first name.
- Make the amount of the lawsuit equal to your student number.