Note: the business documents that accompany this project contain the information needed to complete the assignment.
Preface
Marco Gambetta has been working for years in an established company that is dedicated to minor construction projects in personal or commercial residences. In the summer months the company does landscaping design and installation as well as minor construction projects such as installing interlocking, setting cement curbs and repairing driveways. In the winter months the company offers snow removal services. Marco is affected to summer operations; therefore he works shifts of 10 hours during 5 months while in the winter months he performs other minor jobs for other construction companies.
After years of experience in the broad construction/landscape industry, Marco is convinced that if he opens his own company he will be able to make enough money to live the whole year avoiding the need to look for odd jobs in the winter months. With that idea in mind he sat down with his sister, Lara a recent graduate from a business program, crunched some numbers and decided to launch their own company: Small Construction from their parents house in Ajax.
Description of the business
Marco has the experience not only with doing minor construction projects and landscaping, but also and most importantly he knows how to manage the operation. He realized there might be a good market for his company in the Durham Region since many of the clients not taken by his former large company are from that area. Basically, large, established companies are not interested in taking projects with total bills under $10,000. This will be Marcos niche market.
In the winter of 2016, Marco decided to begin calling potential customers. Before starting the calls, he contacted Amy, the secretary at the large construction/landscaping company and asked if he could be provided the contact information of those clients that were not attended by the company. Amy asked the owners and it was decided that not only they would give the contact information of minor projects that were discarded in past years, but also will refer to Marco all new customers of small projects for a 15% fee calculated on the basis of the materials used for the project.
Marco started to plan the control mechanisms he would use to track materials used and hours invested, also very important for him was to install the philosophy that a site is not left until the project is totally completed.
Tools and Machines:
Marco spent the rest of the winter identifying the equipment needed for the company and decided to rent the use of the equipment for the time it is used.
Marco has a van adapted to transport heavy material valued at $7,000. Marco also has some tools and small machines valued at $5,000. The only important piece of equipment that he does not have is a machine to cut rocks/cement, but a large store has it available for rent at a fee of $250 per day.
Share Capital
For various tax and liability reasons, Marco and Lara decided the business should be incorporated. On May 1st, Marco opened a bank account for Small Construction Co. and deposited the $12,000 of Laras capital contribution. Marco contributed the van and tools and equipment. Marco and Lara each received 6,000 shares of Small Construction Co. capital stock 100% of the shares issued by Small Construction Co.
As could only happen in a fictional term project, Small Construction Co. managed to become incorporated, obtain a business number, begin operations, obtain a floating short term loan from their parents, advertise its services, negotiate insurance and receive payment from its first customers, all on May 1st
Equipment
Marco expects the company will be able to use the van for five years before they need to replace it. After the 5 years the van could be discarded as scrap.
All the other tools and equipment normally lasts for 10 years and will have a resalable value of $500. Marco hoped that damage would be minimal; also he expected repair costs would be minimized as he planned to do most repairs himself.
Advertising
Marco decided on a targeted advertising campaign: Lara will call all the people with small projects that were declined by the large landscaping company. In one afternoon she got six people asking her for a quote, she scheduled Marcos visits for the next day. At the site visits he did the measuring and listened carefully to the customers requests. Then he went back to his van and with Lara draw a draft blueprint of their work, estimated materials and hours needed and in less than 20 minutes they were back discussing the final price with the customer. Out of the six visits, four accepted the price and agreed to start as soon as possible.
Pricing
Pricing is a tricky aspect of the business because if the quote is too high, the customer would not accept it, but if it is too low, the costs might not be covered and the company will go bankrupt. Marco and Lara agreed that as a rule of thumb for the first projects, they will estimate materials needed, and on top of that they would add a markup of 100% to cover all other costs and their profit. However, for projects that are referred by the large company, they would charge a markup of 115% so they can pass on the fee of 15% over materials that the other company will charge.
Inventory management is a critical aspect of the business. Marco has a good business relation with the owners of Sams Materials who can supply all the construction materials they would need for their projects. Marco has worked out an agreement with Sams Materials that will allow him and Lara to pick up whatever they need whenever they need it and pay for all material twice per month: on the 15th and at the end of the month. To secure these conditions, Small Construction makes a payment of $5,000 on May 1st that will be computed against the last bill of materials to be paid (only to happen when Small Construction discontinues operations). This agreement allows Small Construction to have no inventory of material, because everything picked up from Sams Materials is immediately installed in the customers premises.
Employees
Marco and Lara estimate that they can do most of the work, however they will need to hire two non qualified employees who will prepare the site the day before Marco start working (they would perform tasks such as removing grass, old interlocking, rocks, etc). Marco and Lara have a younger cousin that drop out from high school and is doing odd jobs, so they call him and he accepted. Rob, the younger cousin, agreed with Marcos reasoning that paying them by hour worked, rather than a monthly salary, would encourage them to minimize the time invested in each project so they can move fast between projects and maximize income which in turn will also increase customer satisfaction. Workplace regulations required vacation pay be accrued at 4% of the wages. Marco assured Rob and the other employee, Sal, they would receive their accrued vacation pay when they took a vacation, quit or the season ends.
Insurance:
Marco negotiated an all perils, one year insurance policy, effective beginning May 1st, 2016, with RiskIt Insurance. The policy is for the a whole year and covers any liability or damage that might emerge from working in customers premises.
Phone system and mailing address
Marco had a phone line with voicemail installed at home. Marco used this phone number and his home address for all Small Construction business.
Cell phones were also purchased, one for Marco and one for Lara, and customers were given both numbers when they agreed on a project and its price. In order to get a discount price on the phones, Small Construction signed a two year contract. Phone equipments are estimated to last for two years and to have no resale value at the end of their useful life.
Marco authorized the bank to make an automatic withdrawal from the companys bank account to pay the phone company when amounts were due.
Need for an information system
Lara with a business degree was sure that financial statement preparation was required for tax purposes and useful to see how well their business was operating. She knew she needed a system of recordkeeping and operating procedures that would assist her in ensuring:
all projects were paid for;
all projects payments were deposited in the bank;
commitments for projects paid, for but not yet performed, were known;
employees were only paid for hours worked;
payroll source deductions and vacation pay were accurately computed;
equipment was safeguarded and well maintained;
former customers were called to see if they were satisfied with the work done and if they are interested in doing a new project;
payroll, interest and supplier payments were made on time.
The more Lara thought about it, the more she realized that without well thought out systems she would not be able to make enough money for the rest of the year. Also they needed to report Small Constructions financial position, results of operations and cash flow to their parents just in case they need to ask for some money.
Lara realized she would eventually need a computer system tailored to her operations, but she decided that it was best to begin with a non-computerized system. Once the company had been operating longer it would be easier to define the system needs of the business.
Appointment book and project card
The project bookings were tentative until a cheque for $1,000 was received by Small Construction. Lara wrote the tentative bookings in her note pad to keep track of whose project was first. Once payment was received, Lara began a project card showing the payment and listing the dates and times of work performed. Marco would take the project card to the site where the work was done so it can be completed by the end of the day.
Lara and Marco reviewed the project cards daily. When the prepaid amounts account balances were zero, Marco took the project cards home, filed them alphabetically and waited two weeks before Lara called the customers to ask how they had enjoyed the experience with their company and the project in itself.
There were two items not recorded in the appointment book because Lara and Marco were unsure about them:
On June 30th Marco received a $1,000 cheque from the next door neighbor of one of their customers who asked for some minor repairs that can be performed by mid July.
Right before midnight on June 30th a loud noise woke them up. A house in the neighbourhood had exploded and the structure of the surrounding houses have
been severely damaged. A gas leak was the cause. Reading the newspaper on July 2nd Marco realizes that one of the projects scheduled to start on July 5th is on 210 Triana Rd. and that is one of the houses that has been severely damaged by the explosion. Lara contacted the customer and asked about the project, the family said that they will not do it and asked Lara to return the $3,000 deposit.
Daily control sheet
Each day, Marco or Lara completed a daily control sheet. The daily control sheet was designed to capture information about hours worked, equipment usage and damage, payments received and any other relevant piece of data.
Bank deposits
Weekly, Lara prepared a separate bank deposit for the customer payments collected, the weekly total of the amounts listed on the daily control sheets. She prepared another deposit for the cash and cheques received by mail. The book of deposit forms supplied by the bank provided for duplicate copies and Lara kept the copy as part of the business records.
Payroll
Lara added up the hours worked by the two employees from the daily control sheets. Combining that data with the Social Insurance Numbers, hourly rate, and hours worked by each employee she prepared the Payroll Summary for the month [the Payroll Summary for May and June are included with the project documents] that included the payroll source deductions (Income tax, CPP – Canada Pension Plan contributions – and EI – Employment Insurance Premiums), the required employer CPP and EI contributions and accrued vacation pay.
Using the Payroll Summary, Lara wrote cheques on June 3rd and July 3rd to pay the employees and on June 15th and July 15th to remit the source deductions and employer CPP and EI contributions to the Receiver General.
Other Payments
Lara kept all the supplier invoices in a file folder. She reviewed the file folder daily and prepared cheques when payment was due using pre-numberedcheques. She kept the duplicate copy of each cheque as a record of the payment. [Copies of all supplier invoices and the cheques written during May and June are included with the project documents.]
When an invoice was paid, the date of payment and the cheque number were written on the supplier invoice to cross-referencepayments and supplier invoices.
Their capitalization policy is to expense items (purchases) that cost less than $100.
Month-end procedures
On the last day of the month, Lara looked at every project card at each site and listed the account balance that represents the amount of money collected in advance for projects not yet completed. [A copy of this Prepaid Projects List is included with the project documents].
She also estimated the worth of the remaining supplies used to make equipment repairs, and wrote the value of the unused supplies on the bottom of the Prepaid Project List.
As soon as she received the bank statement from the bank, [a copy of the May and June statements are included with the project documents], Lara reconciled the statement to the copies of the bank deposits made and cheques written.
General Ledger Postings and Financial Statement Preparation
Lara has learned about basic financial accounting and how to prepare the initial set of financial statements. She dusted off her textbooks while Marco brought old procedure manuals and instructions from his previous employer. When she was finished, she set- up the general ledger accounts she thought would be needed for Small Construction Co. and posted the transactions and adjusting entries for May and June. Lara estimated that the company owed income taxes of $1,300 for the first two months of operations.
As Lara prepared Small Constructions trial balance and financial statements, she congratulated herself: all her careful planning and systems design had paid off. She not only had the information she needed to prepare the statements in accordance with the generally accepted accounting principles, but she also felt confident that the statements could be relied up when making financial decisions.
REQUIRED: Prepare the accounting records for Small Construction Co.
Note: this task is based on the analysis of very extensive narrative and detailed project documents. Please check the password protected course website for announcements of any errors, omissions and clarifications to the term project description or project documents.
1.Set up the Chart of Accounts
2.Prepare the bank reconciliation at June 30th , 2016
3.Prepare the General Journal for the months of May and June 2016
4.Post all transactions to the T-accounts
5.Prepare a trial balance at June 30, 2016
6.Prepare the Financial Statements in good form for June 2016 including footnotes for a Summary of Significant Accounting Policies and for contingency disclosures that are exclusive of the transactions of this case (do not include general notes). The financial statements must include all transactions made in May and June as if they occurred in one accounting period.
7.Special instructions:
Each General Journal entry should have an explanation under.
Every place where the word Marco or Lara appears in items 1, 2, 3 and 4 of the required substitute your own first name.
8.Based on all the information provided in this project, prepare a memo to Marco and Lara where you as a professional accountant evaluate their business. Specifically address their concerns:
a)How much can be paid in dividends to both partners by June 30th?
b)How much dividends they expect to collect per year if $0.47 per share per month (during 12 months) is what Marco and Lara set as target?
c)What is the target net income to achieve item b) if only working the 5 summer months per year?
d)With the data of the financial statements that you have completed, did Marco and Lara achieved their target as set in tem c)?
e)Make two clear suggestions of how the business can be improved so they can achieve and surpass their target.
The RiskIt Insurance Group 120 North Town Centre Blvd.
Ajax, ON W6G 1C5
Ask For: Stella Stevens INVOICE 98123 TERM 12 Months EFFECTIVE May 1, 2016
ACCT: Small construction Co. POLICY 89245-16 PREMIUM $ 6.000
Date: May 1, 2016 All Perils
YOUR PREMIUM IS DUE AND PAYABLE ON EFFECTIVE DATE OF POLICY Limit of Liability $5.000.000
Coverage is cancelled if not paid within 30 days
Paid May 1st Cheque # 1
QuickPrint
Bill To: Small Construction Co.
p.o. Box 98357
Invoice # 987 Shrub Dr.
Invoice Date Ajax, ON M3J 1P8
Quantity Description Amount
200 business cards $75
200 daily control sheets $100
100 project cards $50
Balance Due $225
Payment before delivery: please make cheque payable to:
QuickPrint
48 Burgess Ave.
Ajax, ON
M7Z 1W9
Paid May 1st Cheque # 2
Value of printed docs available at:
May 31st: $200
June 30th: the double of the last 2
digits of your student number ID
Jimmy’s SuperStore
3 locations to serve you better
Ajax – Newmarket – Markham directions & hours: www.jimmys.com
Envelopes 7.00
Paper 20.00
Pens 10.00
Markers 12.00
Packing Tape 18.00
Painting tape 15.00
Wire 1/18 52.00
Wire 1/9 40.00
Contact glue 16.00
Super Duper Lock 10.00
200.00
May 1st, 2016
Visa 4700 6523 0682 1842
Value of office/repair supplies available at:
May 31st: $110
June 30th: last 2 digits of your student number ID
BelTel
your communication partner
Account Summary for Small Construction Co.
May 30, 2016 Account # 3144950/1
Previous amount due – New Account $0.00
Payment Received – Thank you –
0.00
Current charges – per details below $1,065.16
Total Amount Due $1,065.16
pre-authorized payment June 5, 2016
1% per month, plus a $50 collection fee, will be charged if insufficient funds at payment date
Current Charges – Detail
Equipment – 2 cell phones $900.00
Monthly Basic Service Charges for May : $100.00
Extra fees May for phones
Business Voicemessaging & Call Display package $7.00
System access fee $7.50
911 access $1.22
Extra fees May for cell phones $15.72
Roamming cell #1 $12.00
Long distance calls Cell #1 $5.44
Roamming cell #1 $32.00
Long distance calls Cell #1 $0.00 $49.44
( details not included in project documents)
$1,065.16
Total Charges
BelTel
your communication partner
Account Summary for Small Construction Co.
June 30, 2016 Account # 3144950/1
Previous amount due – New Account $0.00
Payment Received – Thank you 1,065.16
0.00
Current charges – per details below $134.05
Total Amount Due $134.05
pre-authorized payment July 5, 2016
1% per month, plus a $50 collection fee, will be charged if insufficient funds at payment date
Current Charges – Detail
Monthly Basic Service Charges for June: $100.00
Extra fees June for phones
Business Voicemessaging & Call Display package $7.00
System access fee $7.50
911 access $1.22
Extra fees June for cell phones $15.72
Roamming cell #1 $10.00
Long distance calls Cell #1 $8.33
Roamming cell #1 $0.00
Long distance calls Cell #1 $0.00 $18.33
( details not included in project documents)
$134.05
Total Charges
***********************************************
5030 Main St
Ajax, ON, M5N 7J2
May 1, 2016 7:01am
Customer ID: Small Construction Co.
Ajax ON M3J 1P8
Liters Grade Price per liter Total
50 Diesel $1.08 $ 54.00
Total $54.00
Paid in Cash ($55.00)
Change to customer $1.00
***********************************************
5030 Main St
Ajax, ON, M5N 7J2
May 8, 2016 11:30am
Customer ID: Small Construction Co.
Ajax ON M3J 1P8
Liters Grade Price per liter Total
50 Diesel $1.11 $ 55.50
Total $55.50
Paid in Cash ($60.00)
Change to customer $4.50
***********************************************
***********************************************
5030 Main St
Ajax, ON, M5N 7J2
May 19, 2016 3:18pm
Customer ID: Small Construction Co.
Ajax ON M3J 1P8
Liters Grade Price per liter Total
50 Diesel $1.07 $ 53.50
Total $53.50
Paid in Cash ($55.00)
Change to customer $1.50
***********************************************
5030 Main St
Ajax, ON, M5N 7J2
May 26, 2016 5:07pm
Customer ID: Small Construction Co.
Ajax ON M3J 1P8
Liters Grade Price per liter Total
50 Diesel $1.02 $ 51.00
Total $51.00
Paid in Cash ($55.00)
Change to customer $4.00
***********************************************
***********************************************
5030 Main St
Ajax, ON, M5N 7J2
June 5, 2016 8:22am
Customer ID: Small Construction Co.
Ajax ON M3J 1P8
Liters Grade Price per liter Total
50 Diesel $1.12 $ 56.00
Total $56.00
Paid in Cash ($60.00)
Change to customer $4.00
***********************************************
5030 Main St
Ajax, ON, M5N 7J2
June 16, 2016 10:02am
Customer ID: Small Construction Co.
Ajax ON M3J 1P8
Liters Grade Price per liter Total
50 Diesel $1.09 $ 54.50
Total $54.50
Paid in Cash ($55.00)
Change to customer $0.50
***********************************************
***********************************************
5030 Main St
Ajax, ON, M5N 7J2
June 21, 2016 3:04pm
Customer ID: Small Construction Co.
Ajax ON M3J 1P8
Liters Grade Price per liter Total
50 Diesel $1.05 $ 52.50
Total $52.50
Paid in Cash ($55.00)
Change to customer $2.50
***********************************************
5030 Main St
Ajax, ON, M5N 7J2
June 30, 2016 11:59pm
Customer ID: Small Construction Co.
Ajax ON M3J 1P8
Liters Grade Price per liter Total
50 Diesel $1.00 $ 50.00
Total $50.00
Paid in Cash ($50.00)
Change to customer $0.00
***********************************************
Sam’s Materials
25 years of experience in construction materials
25 Mersner Ct
Ajax, Ontario
M3J OF8
Advanced payment for future delivery of materials $ 5,000.00
Small Construction Co. p.o. Box 98357
987 Shrub Dr. Ajax, ON M3J 1P8
Paid May 1st Cheque # 3
Sam’s Materials
25 years of experience in construction materials
25 Mersner Ct
Ajax, Ontario
M3J OF8
Bill To: Small Construction Co. Invoice #: 2016-154
p.o. Box 98357 Invoice Date: May 15 ,2016
987 Shrub Dr.
Ajax, ON M3J 1P8
Date taken Description Details Amount
12-May-16 Interlocking blocks Veneto $ 3,500.00
12-May-16 Polimer sand 50 Kg $ 200.00
5-May-16 Cement 25 kg $ 150.00
5-May-16 Flag stone 22 slabs $ 8,000.00
10-May-16 Asphalt 25 kg $ 200.00
Previous Payments and Overdue New Total
Balance Adjustments Balance Charges Amount Due
$0 $0 $0 $12,050 $12,050
terms: No return accepted without prior written authorization.
All claims must be made within 5 days following receipt of Goods
INVOICE/FACTURE Paid May 15th
Cheque # 4
Sam’s Materials
25 years of experience in construction materials
Ajax, Ontario Paid May 30th
25 Mersner Ct Cheque # 5
M3J OF8
Bill To: Small Construction Co. Invoice #: 2016-182
p.o. Box 98357 Invoice Date: May 30 ,2016
987 Shrub Dr. INVOICE/FACTURE
Ajax, ON M3J 1P8
Date taken Description Details Amount
21-May-16 Interlocking blocks Antica $ 6,100.00
21-May-16 Polimer sand 80 Kg $ 300.00
17-May-16 Cement 25 kg $ 300.00
17-May-16 Flag stone 8 slabs $ 3,500.00
23-May-16 Top soil and sod grass 100 m2 $ 500.00
Previous Payments and Overdue New Total
Balance Adjustments Balance Charges Amount Due
$0 $0 $0 $10,700 $10,700
terms: No return accepted without prior written authorization.
All claims must be made within 5 days following receipt of Goods
Sam’s Materials
25 years of experience in construction materials
25 Mersner Ct
Ajax, Ontario
M3J OF8
Paid June 15th Cheque # 10
Bill To: Small Construction Co. Invoice #: 2016-213
p.o. Box 98357 Invoice Date: June 15 ,2016
987 Shrub Dr. INVOICE/FACTURE
Ajax, ON M3J 1P8
Date taken Description Details Amount
12-Jun-16 Interlocking blocks Regular $ 3,200.00
12-Jun-16 Polimer sand 50 Kg $ 200.00
5-Jun-16 Top soil and sod grass 900 m2 $ 4,500.00
3-Jun-16 Sand and gravel 3 m3 $ 180.00
Previous Payments and Overdue New Total
Balance Adjustments Balance Charges Amount Due
$0 $0 $0 $8,080 $8,080
terms: No return accepted without prior written authorization.
All claims must be made within 5 days following receipt of Goods
Sam’s Materials
25 years of experience in construction materials
25 Mersner Ct
Ajax, Ontario
M3J OF8
Bill To: Small Construction Co. Invoice #: 2016-247
p.o. Box 98357 Invoice Date: June 30 ,2016
987 Shrub Dr.
Ajax, ON M3J 1P8
Date taken Description Details Amount
16-Jun-16 Interlocking blocks Urban $ 8,600.00
16-Jun-16 Asphalt 100 kg $ 500.00
25-Jun-16 Cement 25 kg $ 130.00
25-Jun-16 Flag stone 18 slabs $ 6,300.00
Previous Payments and Overdue New Total
Balance Adjustments Balance Charges Amount Due
$0 $0 $0 $15,530 $15,530
terms: No return accepted without prior written authorization.
All claims must be made within 5 days following receipt of Goods
INVOICE/FACTURE Paid June 30th
Cheque # 11
Home Max
your tool box
Summary of account with customer 20-2200124 – 16
Small Construction Co.
p.o. Box 98357
987 Shrub Dr. Invoice: 20-2200124-2016-001
Ajax, ON M3J 1P8 Date May 30th 2016
Cutting machine rent Paid June 3rd
May
Cheque # 8
Hours 8.00
Rate 250.00
Rent to pay 2,000.00
terms: payment to be received within 5 business day from the date of this account summary. Late payments carry an interest of 1% per day.
Home Max
your tool box
Summary of account with customer 20-2200124 – 16
Small Construction Co.
p.o. Box 98357
987 Shrub Dr. Invoice: 20-2200124-2016-002
Ajax, ON M3J 1P8 Date June 30th 2016
Cutting machine rent
Hours
Rate
Rent to pay
terms:
June Paid July 3rd
12.00 Cheque #15
250.00
3,000.00
250.00
payment to be received within 5 business day from the date of this account summary. Late payments carry an interest of 1% per day.
Payroll Summary
May and June 2016
Employee Wages, and Taxes May – Sal May – Rob June – Sal June – Rob TOTAL
627.0
Hours Worked 80.0 225.0 102.0 220.0
Hourly Reg. Rate 15.00 15.00 15.00 15.00 19.00
Gross Pay 1,200.00 3,375.00 1,530.00 3,300.00 9,405.00
Taxes Withheld (1,316.70)
Federal Income Tax (168.00) (472.50) (214.20) (462.00)
CPP – Employee (51.60) (145.13) (65.79) (141.90) (404.42)
EI – Employee (25.20) (70.88) (32.13) (69.30) (197.51)
Total Taxes Withheld (244.80) (688.50) (312.12) (673.20) (1,918.62)
Net Pay 955.20 2,686.50 1,217.88 2,626.80 7,486.38
Employer Taxes and Contributions 404.42
CPP – Company 51.60 145.13 65.79 141.90
EI – Company 36.00 101.25 45.90 99.00 282.15
Total Employer Taxes and Contributions 87.60 246.38 111.69 240.90 686.57
Vacation Pay Accrued 48.00 135.00 61.20 132.00 376.20
Paid to the Receiver General with : Cheque #9 for May Cheque #16 for June
Salaries of May Paid June 3rd Cheques #6 and #7
Salaries of June Paid July 3rd
Cheques #13 and #14
MB Bank Statement of Account Account
2590 Main Street 234-567-16
Ajax ON M3J 1P7 Current Account
