Advanced Bookkeeping Assignment Construction Project

Added on -2019-09-20

| 32 pages
| 6118 words

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Note: the business documents that accompany this project contain the
information needed to complete the assignment.
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
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
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
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
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
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.
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 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.
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.
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
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
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
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.
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
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
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
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?

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