A Case of Cash-Based to Accrual Accounting
The significance of students understanding process of converting cash based accounting information to accrual-based accounting financial statements could not be emphasized enough. This concept is introduced in first financial accounting class and then expanded upon in first intermediate accounting class. Oxcom Enterprises is typical small business which maintains limited financial records and relies on its accountant to accumulate this information into accrual based financial statements at year-end. The case needs the student to use previous year financial statements and some extra information to create adjusting entries and prepare financial statements. Students also receive practice in use of the accounting work sheet. The case format is flexible and could be easily expanded to include, or exclude particular facets. The case format here includes lease type transaction, an indirect method statement of cash flows but excludes issues relating to deferred taxation. It also includes a requirement to draft in suitable format the footnote for long term debt.
OXCOM ENTERPRISES INC.
Oxcom Enterprises Inc. (Oxcom) sells personalized items like mugs, key chains and plaques to the public. Company was started by two high school friends 8 years ago. Oxcom was organized by issuing 40,000 shares of $0.25 par stock to a number of investors. At that time they also got start-up capital from a loan from a financial institution. During the present year they have sought further capital by issuing an additional 10,000 shares to new investors.
Like many other small companies, Oxcom is required to create accrual basis financial statements at the end of the year for submission to its bank and to stockholders. Since the size of the company and fact that it does not have the accountant on its payroll, Oxcom has maintained simple records of its transactions based on cash basis of accounting. They have come to you as the accountant for assistance and have provided you with the box of records containing which contain information essential to record transactions which occurred for the year. These records must provide enough information to create a worksheet summarizing year’s transactions and adjusting journal entries essential to prepare financial statements for the 2013 fiscal year. From 2012 accounts of Oxcom Enterprises which were filed with bank you have obtained the following audited balance sheet (post closing trial balance) as of December 31, 2012.
Accounts receivable 13,000
Prepaid insurance 900
Accumulated depreciation – buildings $15,000
Accumulated depreciation- equipment 6,000
Accounts payable 27,400
Advances from customers 1,100
Salaries payable 2,100
Taxation payable 5,000
Interest payable 1,200
Long term loan payable 60,000
Capital stock $0.25 par 10,000
Paid in capital 16,000
Retained earnings 80,100
From the analysis of the company’s 2013 bank account and related vouchers and invoices you have determined the following:
Sales and other collections from customers $331,200
Proceeds from sale of equipment 5,000
Issue of 10,000 $0.25 par shares 12,500
Interest income 1,200
Total cash receipts $349,900
Included in cash collections is deposit of $4,800 made by the customer for a job to be performed in 2014. The jobs relating to the 2012 deposits in advance were completed in 2013.
The proceeds from sale of equipment arose from sale of a piece of equipment on December 31, 2013. The original cost of the equipment was $6,000, and the accumulated depreciation on this equipment at the start of the year was $3,000.
Payments relating to purchase of merchandise $163,000
Extension to building 11,000
Payment for purchases of equipment 10,000
Payment of salaries and wages including payroll taxes 88,600
Payment of utilities 4,600
Payment of telephone 3,400
Payment of insurance bills 1,500
Payment of interest and principal on bank loan 14,600
Van payments 11,000
Payment of dividend to shareholders 11,000
Payment for income taxes including tax deposits 13,400
Total disbursements $332,100
You also have determined the following facts:
1. At December 31, 2013 outstanding accounts receivable totaled $30,000. In previous years, uncollected accounts receivable have been small and company used direct prepare-off method for bad debt. Though, Oxcom has started to offer more credit in the attempt to bring in more corporate business. At December 31, 2013, 10% of the outstanding accounts receivable are considered to be doubtful as to collectibility.
2. Merchandise inventory at December 31, 2013 was counted and valued at cost of $51,500.
3. The insurance policy paid during the year covered the period from September 1, 2013 to August 30, 2014. The previous year payment covered earlier part of the year.
4. Accounts payable at December 31, 2012 and 2013 were $25,400 and $21,200, respectively. An analysis of these accounts payable balances revealed the following:
Relating to 2012 2013
Merchandise purchases 24,000 20,000
Equipment 2,000 -
Telephone 500 400
Utilities 900 1,800
5. Accrued salaries and wages at December 31, 2013 are to be established on following basis. Payroll was paid for the two weeks to December 26, 2013 on December 28, 2013. Payroll for two week period to January 9, 2014 was paid on January 11, 2014. The total of this payroll and employees benefits was $14,000. (Suppose a seven day work week)
6. Depreciation of original buildings is on the straight-line basis assuming a 25-year useful life with no residual value. Depreciation on the building extension is to be over a remaining life of 18 years. Depreciation of equipment and vehicles is on a straight-line basis assuming a 5-year useful life with no residual value. A half year’s depreciation is taken on assets acquired or disposed of in the current year. No assets are fully depreciated by December 31, 2013.
7. The loan principal on the 8% fixed rate bank loan will be repaid in ten equal principal payments (12 from the start of the year) of $5,000 every six months on March 31 and September 30 each year plus the accumulated interest for that period based on the outstanding principal balance.. The principal payments and the correct amount of interest have been paid so far on the due dates. The next principal payment is due on March 31, 2014. The loan is secured on the land and buildings of the company.
8. On June 30th of the current year, the company purchased a delivery van. It made a down payment of $3,000 on the date of purchase and financed the balance of the vehicle with the vendor. Oxcom will make eight quarterly payments of $4,000 each commencing September 30, 2013. A reasonable market rate of interest on this loan would be 10%. The September and December payments were made on the due dates. The loan is secured on the delivery van. You will have to determine the cost price of the van and how to deal with the loan finance.
9. The issue of shares occurred on June 30 .2013.
10. Taxation at a rate of 30% of net profits before tax is to be provided for. Deferred tax is not applicable to this case.
11. All matters above are deemed to be material.
1. Create in good form the classified comparative balance sheet, and the multi-step single year income statement and statement of stockholders’ equity for Oxcom Enterprises for the 2013 year.
In order to achieve this you must perform this exercise in an excel spreadsheet formatted and linked as you wish. The following is a suggestion:
(a) Enter the opening balances for 2013 into the multi-column Excel spread sheet (work sheet) using following column headings:
2. Opening Trial Balance)
3. Adjustments (with columns for Dr and Cr)
4. Corrected Trial Balance
(b) Post essential entries to the work sheet to record cash transactions for the year (adjustments column). Keep a separate record of the journal entries posted with a short description in the general journal.
(c) Post essential entries to the work sheet to record adjustments to the accounts required to create the financial statements (adjustments column). Keep a separate record of journal entries posted with a short description in general journal.
(d) Create the financial statements from worksheet.
This spreadsheet must be available for my review if requested.