Case Study please help me for this case report for a presentation Alpha Classic Car Restorations John Wallace is an automotive enthusiast. He has over 25

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Alpha Classic Car Restorations

John Wallace is an automotive enthusiast. He has over 25 years of experience as a mechanic for
the dealership of a large car manufacturer in Oakville. John also gained experience doing minor
body work and painting.

Recently, John decided to retire from the car dealership and pursue his interest of restoring
classic American muscle cars. Accordingly, John started Alpha Classic Cars Restoration (ACCR). John
leased an industrial building and converted it into a repair and body shop. The building’s land has a
small parking lot that is used to showcase the restored vehicles that are for sale.

Generally, John selects the classic muscle cars that ACCR will restore and then places them for
sale to the general public in the lot. John also posts his vehicles to various Internet sales sites,
frequents car shows, and uses the clas-sifieds of local newspapers to market his inventory. ACCR
also takes custom jobs, whereby an individual can request the car to be restored.

ACCR has a December 31, 2020, yearend, and just completed its first year of operations. John had
a friend help him compile financial statements for the year end (draft financial statements can be
found in Exhibit I). ACCR’s bank requires the preparation of annual audited financial statements in
accordance with IFRS (details of the loan agreement can be found in Exhibit II), and the auditors are
scheduled to commence year-end work on January 18.

Realizing that ACCR needs accounting assistance, John has hired you, CPA, as a consultant on
December 24, 2020. Your first task is to review the draft financial statements and provide any
recommendations to comply with IFRS. In addition, John required some assistance preparing a
statement of cash flow. John has provided you with a file for review, which outlines all the significant
transactions that have taken place during the year (Exhibit III).

Aside from the year-end statements, John would also like to know whether he will be able to pay
any dividends in the current year. He has drawn a minimal salary and is hoping to supplement his
income by paying a $35,000 dividend with the current cash balance.

Finally, John has asked you to provide some advice regarding the additional controls or procedures
that could be implemented to improve the day-to-day operations of the company.

Required

John has asked you to prepare a report that discusses all of the material accounting issues (i.e.,
identify the issues, discuss the implications, offer alternative treatments, and provide a
recommendation). Revised financial statements should be included in the report. The report should
also address John’s other concerns. Provide journal entries, where appropriate.

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Exhibit I
Draft Financial Statements

Statement of Financial Position

As at December 31 (unaudited) 202
0

Assets

Current Cash

Accounts receivable

Inventory
Prepaid insurance

Capital assets

$ 35,449

45,000

95,775

1,775

177,999

287,250

$465,249

Liabilities and shareholders’ equity

Current

Accounts payable and accruals$ 8,455

Income taxes payable17,334

25,789

Long-term bank loan277,240

Common shares74,500

Retained earnings87,721

162,220

$465,249

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For the year ended December 31
(unaudited)

202
0

Sales

Cost of sales Gross profit

Expenses

Advertising and promotion Bad

debt

Depreciation Insurance

Interest

Legal and accounting Lease

expense

Office and general expenses

Repairs and maintenance

Utilities
Wages and benefits

$ 320,000

128,000

192,000

Operating income

Other service income Income

before taxes
Provision for income taxes
(16.5%)

Net income

2,000

0

22,750

1,500

16,920

2,500

30,000

2,775

750

11,000

22,500

112,695

79,305

25,750

105,055

17,334

87,721

Opening balance—retained earnings

Net income Dividends
Closing balance—retained earnings

0

87,721

0

$ 87,721

Exhibit II
Bank Loan Agreement

The Bank of Toronto has provided a $300,000 loan to help finance•
working capital and capital assets. The following are the terms and
conditions of the loan.

Security: The bank secures its loan with a first claim against
inventory and accounts receivable.

Repayment: The loan is to be repaid over a 10-year period,
with blended monthly payments.

Interest rate: The rate of interest is 6%, effective annual rate
(EAR).


Covenants: ACCR must comply with the following covenants:

The current ratio must not be below 2:1.

The debt to equity ratio must not exceed 3:1. Debt is defined as
both current and long-term liabilities.
A violation of either covenant will result in the loan becoming
payable upon demand.

Financial statements: Audited financial statements are to be
presented no later than 60 days after year end. Financial
statements can be prepared with ASPE.

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• During the first year of operations, ACCR made the following sales:

1. 1972 Chevy Camaro, Z28 45,000

2. 1978 Chevy Corvette Coupe, 5th
anniversary 33,000

3. 1969, Pontiac, GTO 38,000

4. 1967 Ford Shelby Mustang 55,000

5. 1974 Dodge Dart 33,000

6. 1970 Buick GSX 40,000

7. 1970 Chevelle 454 SS 37,000

8. 1970 Plymouth Hemi 39,000

§ ACCR is so confident in its workmanship that it offers a 10-year bumper-
to-bumper warranty with all car sales. The warranty covers all defects and
breakdowns that are not directly related to regular wear and tear. John is
unsure of how much the warranty will cost to service, but is confident that
his vehicles will stand the test of time. Based on his experience, John
estimates the probability of a vehicle making a warranty claim during the
10 years of coverage are as follows:

Year 1 2 3 4 5 6 7 8 9 10

1% 2% 2% 5% 5% 10% 12% 15% 18% 20%

• The average retail value per claim is $1,250. The average cost of parts
and service at ACCR is about 60% of that of a dealership.

• ACCR sold the 1972 Chevy Camaro to a wealthy telecom CEO
during the year. Shortly after delivery of the vehicle, John found out
that the CEO resigned from the company due to various accounting
irregularities and restatements. John has been in contact with the
customer and knows that he is happy with the car, and fully intends
to pay once things settle down.

• ACCR entered into a lease agreement on January 1 for the land and
building that is used as the repair and body shop. ACCR is required to
make monthly payments of $2,500, commencing January 31, for a 10-
year period (at which point, John expects to be fully retired and live off

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of his pension). The following additional information is available
regarding the lease:

• The rate implicit in the lease is 7%.

• The building and land have fair values of $170,000 and$56,667,

respectively.
• The building has a useful life of approximately 13 years.
• The lease payments were set to provide the lessor with a

return of 60% related to the building and 40% related to the
land.

• There is no bargain purchase option, or renewal option, at the
end of the lease.

• The capital asset breakdown is as follows:

Capital Asset Cost
Accumulated
Depreciation Net Book Value

Machinery and
equipment

250,000 15,500 234,500

Leasehold
improvements

10,000 2,000 9,000

Office equipment 25,000 3,125 21,875
Vehicles 25,000 3,125 21,875

310,000 22,750 287,250

• The leasehold improvements include changes to the building
and land (e.g., paving). The machinery and equipment is
expected to have a residual value of $95,000 after their 10-
year useful life. Both the office equipment and vehicle are
expected to have useful lives of eight years, with no residual
values.

• The income taxes presented in the financial statements are
based
on the pre-tax income times the tax rate of 16.5%. No adjust-
ments have been made to calculate taxes in accordance with
the Income Tax Act even though the deferred taxes method has
been adopted. The following are the CCA rates relevant to the
capital assets of ACCR:

1. Machinery and equipment: 30%
2. Leasehold improvements: 10 years, straight-line
3. Office equipment: 20%
4. Vehicles: 30%

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• The inventory balance includes a 1971 Corvette Coupe. The
car was a custom order for a doctor. Due to financial problems,
the doctor was unable to purchase the vehicle, at which point
ACCR repossessed the vehicle. The vehicle is included in
inventory at its cost of $35,000. The vehicle will require minor
moderations, costing up to $5,000, to make it ready for resale
at a price
of $35,000.

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