BTB110
Assignment #1 - Value of 10% of Final Grade
Due: Tuesday, March 6,2012
This assignment can be done in groups of 2 – that is, one assignment to be handed in for two people.
1. Patsy and Perry Ross, local golf stars opened the Chip-Shot Driving Range on May 1, 2005, by investing $20,000 of their cash savings in the business. A caddy shack was constructed for cash as a cost of $6,000, and $800 was spent on golf balls and golf clubs. The Rosses leased five acres of land at a cost of $1000 per month and paid the first month’s rent. During the first month, advertising costs totaled $750, of which $150 was unpaid at May 31. Members of the high school golf team were paid $400 for retrieving golf balls. All fees from customers were deposited in the company’s bank account. On May 15, Patsy and Perry withdrew $800 cash for personal living expenses. A $100 utility bill was received on May 31, but it was not paid. On May 31, the balance in the company’s bank account was $15,100.
Patsy and Perry weren’t sure how they did in their first month of operation. Their estimates of profitability ranged from a loss of $4900 to net income of $1650.
Questions to Answer:
a)How could the Rosses have concluded that the business operated at a loss of $4900? Was this a valid way to determine net income?
b)How could the Rosses have concluded that the business generated a net income of $1650? (HINT: Prepare a balance sheet at May 31) Was this a valid way to determine net income?
c)Without preparing an income statement, determine the net income for May.
d)What were the fees earned for May? (HINT: You can determine this either by (1) preparing an income statement, and using your answere from part (c) and the information about expenses to calculate the missing amount for fees earned (revenue), or (2) analyzing the changes in cash and inserting the missing amounts for fees (cash receipts).)
2.Air Canada sells tickets for airline flights to passengers at a number of different points of sale. For example, you can purchase a ticket in advance (seat sale fare) that may be non-refundable or include restrictions about making changes; you can purchase a fully refundable full-fare ticket up to the time of flight departure; or you can fly stand-by at the last minute.
Air Canada’s management team is brain-storming its options in terms of recognizing the revenue from its ticket sales. One person says the airline should recognize revenue when it advertises the seat sale because these are such great fares that it is clear that every seat will be sold. Another states that revenue should be recognized when passengers pick up their tickets and pay for the flight. “What about when the boarding passes are collected at the gate?” a third asks. “Or when passengers arrive at their destinations?” a fourth adds.
Questions to answer:
a)For each revenue recognition option suggested in the case above, evaluate the effect of the option on recorded revenues, expenses and net income for the period in question.
b)After making the comparison, decide on the point at which you think Air Canada should recognize revenue from flight ticket sales. Explain why you think this point of revenue recognition is the best, referring to generally accepted accounting principles in your answer.