Comprehensive Problem – Crater Canoe Company

Crater Canoe Company is a service-based company that rents canoes for use on local lakes and rivers. Amber Wilson graduated from college about 10 years ago with a BS in Business. Because she loves the outdoors, she has decided to begin a new business that will combine her love of outdoor activities with her business knowledge. Amber decides that she will create a new sole proprietorship, Crater Canoe Company or CCC for short. The business began operations on November 1, 2018.

The transactions for November have already been recorded and posted to the T-Accounts.

Requirements:

Part 1: Financial Statement Preparation:

Now we are at the end of December. The transactions for December are shown below. You will need to do the following:

1. Record the transactions in a journal using correct journal entry format.
2. Post the journal entries to the ledger (T-Accounts).
3. Total the T-Accounts.
4. Prepare the unadjusted Trial Balance.
5. Record the adjusting journal entries based on the information below. (Post the adjusting entries to the T-Accounts. In the T-accounts, denote each adjusting amount as and an account balance as Bal.)
6. Prepare an Adjusted Trial Balance.
7. Prepare the income statement of Crater Canoe Company for the two months ended December 31, 2018.
8. Prepare the statement of owner’s equity for the two months ended December 31, 2018.
9. Prepare the balance sheet as of December 31, 2018.

• Remember, the entries from November have already been recorded. The beginning balances in the T-Accounts as of December 1^st represent the ending balances as of November 30^th. Don’t forget to account for the beginning balances when you total your T-Accounts.

 

Part 2: Financial Statement Analysis:

As the accountant for the company, you will need to write a memo to the owner making an analysis of the financial position at December 31^st. Make your analysis of the health of the company using the following calculations & ratios:

Working Capital

Current Ratio

Profit Margin

Debt to Equity

Calculate the ratios and explain what they tell us about the company – how can we use them to assess the health of the company. (Ratios can be found throughout the text and in Chapter 17.)

How does the company compare to others in the industry on the ratios? Assume that the industry average for the ratios is as follows:

Current Ratio 2.5

Profit Margin 38%

Debt to Equity 10%

Last, the owner is thinking about incorporating the business. Give her some advantages and disadvantages of doing so.

Use proper memo format for this portion of the assignment. Complete your memo in Word. Use your most professional business writing, correct grammar and spelling, and be thorough but brief. The memo should be approximately 1 – 1.5 pages. 

 

December Transactions:

 

Dec. 1	Amber Wilson, Owner contributed land on the river (worth $85,000) and a small building to use as a rental office (worth $35,000) in exchange for capital. (First transaction has been done for you – see Journal Entries and T-Accounts)
1	Prepaid $3,000 for three months’ rent on the warehouse where the company stores the canoes.
2	Purchased canoes signing a note payable for $7,200
4	Purchased office supplies on account for $500.
9	Received $4,700 cash for canoe rentals to customers.
15	Rented canoes to customers for $3,500, but will be paid next month.
16	Received a $850 deposit from a canoe rental group that will use the canoes next month.
18	Paid the utilities ($150) and telephone bills ($175) from last month.
19	Paid various accounts payable, $2,000.
20	Received bills for the telephone ($275) and utilities ($295) which will be paid later.
30	Paid wages of $1,900.
31	Amber Wilson withdrew cash of $500 from the business.

 

 

Adjusting Entries (see Chapter 3 for examples of adjusting entries)

At December 31, the business gathers the following information for the adjusting entries:

1. Office supplies on hand, $165
2. Rent of one month has been used. (Hint: see Chapter 3 for adjusting for prepaids)
3. Determine the depreciation on the building using straight-line depreciation. Assume the useful life of the building is five years and the residual value is $5,000. (Hint: The building was purchased on December 1.)
4. $400 of unearned revenue has now been earned.
5. The employee who has been working the rental booth has earned $1,250 in wages that will be paid January 15, 2019.
6. Crater Canoes has earned $1,850 of canoe rental revenue that has not been recorded or received.
7. Determine the depreciation on the canoes purchased on November 3 using straight-line depreciation. Assume the useful life of the canoes is 4 years and the residual value is $0.
8. Determine the depreciation on the canoes purchased on December 2 using straight-line depreciation. Assume the useful life of the canoes is 4 years and the residual value is $0.
9. Interest expense accrued on the notes payable, $50.