Transactions for March 2020 that require assistance:
1. On March 1, TREI's hauling van broke down. It was determined that it was too costly to repair, so TREI sold it to a salvage yard for $4,000 cash. The van was originally purchased in 2011 at a cost of $45,000 with an estimated 10-year useful life and a $5,000 salvage value. The van had been depreciated using the double declining balance method. The depreciation for the 2020 fiscal year has not yet been recorded. (Hint: you will need to update the depreciation before recording the sale.)
2. March 1 - TREI immediately purchased a slightly used van for $60,000 cash. It is expected that the new van will have an 8-year useful life and a salvage value of $6,000. Similar to the old van, the new van will be depreciated using the double declining balance method and partial year's depreciation.
3. March 6 - Sold forty confidential bins to Lau Enterprises for $8,000 on account with terms 2/10, n/30. The cost of the equipment to TREI was $5,400.
4. March 9 - Lau Enterprises complained that 5 of the bins purchased on March 6 were damaged on delivery and were being returned back to TREI.
5. March 12 - Purchased on account, confidential shredding bins (inventory) in the amount of $10,500 with terms 2/10, n/30.
6. March 13 - Received payment in full from Lau Enterprises.
7. March 13 - Paid bi-weekly payroll of $8,900 gross pay for the 10 working days. CPP was $450; EI was $125, and Payroll Taxes Withheld was $1,800.
8. March 17 - TREI signed a shredding contract with a new client, Brentwood Industries. The contract will run from April 1, 2020, to March 31, 2021, at an agreed-upon rate of $800 per month.
9. March 19 - Paid for the confidential shredding bins purchased on March 12.
10. March 27 - Paid bi-weekly payroll of $8,900 gross pay for the 10 working days. CPP was $450; EI was $125, and Payroll Taxes Withheld was $1,800.
11. March 30 - After repeated attempts to collect the $6,400 receivable owing from Smith & Jones Company, it was deemed uncollectible and written off.
12. March 31 - Received an invoice from Suncorp Energy for power and electrical during March in the amount of $2,500. This amount has not been recorded and won't be paid until April.
13. March 31 - TREI declared and paid a $20,000 dividend to its shareholders.
Other Information (2020 Adjusting Journal Entry Details)
1. Shredding Supplies on hand at March 31st had a cost of $7,900.
2. The Prepaid Insurance balance represents insurance that covers TREI from Jan 1, 2020, to June 30, 2020. No adjustments have been made since the original entry.
3. March 1 - TREI received $3,900 from the not-for-profit group in rent which covers the months of March, April, and May. The office assistant recorded the full amount in Rent Revenue.
4. Wages - There are two remaining working days in March (30 and 31) to be accrued based on the same gross pay as the bi-weekly payroll. CPP is calculated to be $90; EI is $25, and Payroll Taxes Withheld is $360.
5. The bank loan of $80,000 was negotiated on April 1, 2019, over a 4-year term at an interest rate of 3%. Monthly interest payments began on May 1, 2019. Interest payments have been recorded each month up to March 1, 2020.
6. Depreciation on the shredding equipment has not yet been recorded. A new commercial shredder was purchased a year ago on April 1, 2019. It is expected that the new shredder will have the capacity to shred 91,520,000 kilograms of paper over its useful life and have a salvage value of $5,000. The units-of-production method is considered to be the most meaningful method of assessing its consumption. During the 2019-2020 fiscal year, the shredder processed 7,321,600 kg of paper.
7. The office furniture was purchased on September 1, 2018, at a cost of $26,400. The estimated life of the office furniture is 8 years. It was decided to depreciate the furniture using the straight-line method and a salvage value of $2,500. The depreciation for the 2020 fiscal year-end has not yet been recorded.
8. The depreciation for the new van has not yet been recorded.
9. TREI uses the aging method for estimating bad debts for the year. The accounts receivable balance is to be aged as follows: (1) $90,000 @ 1-30 days old - 3% uncollectible, (2) $45,000 @ 31-90 days old - 10% uncollectible, (3) $27,000 more than 90 days old - 40% uncollectible. These amounts already include any sales returns, allowance, and discounts that occurred.
10. The tax rate for TREI is 30%
Required: All answers to the following must be completed in the Excel template provided, placed in the appropriate worksheet tab.
1. Prepare the outstanding journal entries for March 2020 and any required adjusting journal entries for the 2020 year-end. Show all calculations for your entries. [28 marks]
2. Post all journal entries and adjusting journal entries to the T-accounts provided in the Excel template. [6 marks]
3. Prepare a properly formatted multi-step income statement [23 marks] and statement of retained earnings [6 marks] for the year ended March 31, 2020, as well as a properly formatted classified balance sheet [35 marks] as at March 31, 2020. (see worksheet tabs in Excel template)
4. You are required to analyze and comment on certain quantitative and qualitative factors of TREI through the following questions [12 marks]:
a. The bank loan that TREI currently has contains a loan covenant where the current ratio must be a minimum of 2.0. Does TREI meet the loan covenant or not on March 31, 2020? If TREI were to not meet the loan covenant, what are the ramifications to TREI? What specifically could the company do to ensure it meets the loan covenant? Explain.
b. TREI has paid a cash dividend of $20,000 to its shareholders. What does this do to the health and profitability of the company? Is this a good or bad idea and why?
c. TREI uses the straight-line method for depreciating its office furniture. If they had decided to use a double declining balance method instead, explain how this would have impacted the financial statements and if it impacts the profitability of TREI and the condition of the loan covenant.