Can someone answer all of Part 2 please? ?Thank you
BTown Coach Service
On November 1, 2015, BTown Coach Service (BTown) was incorporated in Massachusetts.
BTown will be offering commuter bus service from Boston Logan International Airport to
various locations in New England and the Mid-Atlantic region. There will not be any overnight
service. Limited service is expected to begin on January 1, 2016, and new routes will be added
over the next twelve months.
BTown is authorized to issue up to 800,000 shares of its $1 par common stock. On November 1,
2015, the co-founders Ted and Tim, CEO and CFO of BTown, each purchased 50,000 shares of
common stock of BTown. The CEO (Ted) purchased his stock for cash in the amount of $10 per
share, for a total of $500,000. The CFO (Tim) gave BTown a building on a parcel of land with a
total fair market value of $500,000 in exchange for 50,000 shares. The CFO purchased the
property 15 years ago at a purchase price of $200,000. The building has a front office space and
is of sufficient square footage and height to store several buses when they are not in use and has
available space to build a small repair shop so that BTown can perform light maintenance on its
own buses. The building is empty and has a fair market value of $400,000, with the remainder of
$100,000 attributed to the fair value of the parcel of land. The building has an expected useful
life of 40 years with zero salvage value.
BTown hired Harbor Legal and Accounting Services to draft and process the documents relating
to the incorporation and establishment of BTown. Harbor has billed BTown $50,000. The owner
of Harbor is a friend of the co-founders of BTown and agreed to accept 2,500 shares of common
stock in exchange for half of the legal and accounting services rendered, with the balance of
$25,000 paid in cash. The bill to Harbor was dated November 15, for work performed related to
the start-up of BTown. On November 30, Harbor was paid and the common shares were
distributed to Harbor.
On November 15, BTown signed a purchase order for 5 luxury coach buses at a unit price of
$820,000, for a total purchase price of $4.1 million. This purchase order does not have any
cancellation penalties and deposits are 100% refundable up until the date the buses are delivered
in satisfactory condition. These buses seat 50 passengers and have ample storage capacity for
luggage. The buses are hybrid fuel buses relying on diesel fuel. BTown expects the buses to have
a 20 year life with zero salvage value and the buses will go into service on January 1, 2016, the
date BTown starts to provide transportation services. BTown finances the purchase with
$100,000 in cash paid on the date the purchase order contract is signed, November 15, 2015, and
a note for 5 equal annual payments of $800,000 plus interest beginning on December 31, 2016.
BTown?s borrowing rate is 10%. The buses were delivered in satisfactory condition and the note
was signed on December 31, 2015.
On December 5, BTown purchased state of the art reservation software and a computer for the
total price of $60,000. BTown pays the bill in full on the date of delivery, December 5, 2015.
BTown expects the software and hardware to have a life of 5 years with no salvage value.
BTown also entered into a 5 year service contract with the vendor at a cost of $300 per month
and paid for the first year ($3600) up front on December 5. BTown will begin using the
1 computer and reservation system on January 1, 2016. The service contract also goes into effect
on January 1.
During December, BTown embarked on a print, radio and TV ad campaign to make the local
market aware of the new bus service at a total cost of $8,000. BTown made an initial retainer
payment to the advertising agency on December 1 in the amount of $1,000. The ad agency billed
the remaining $7,000 to BTown on December 31, terms n/30. BTown paid the bill on January 31.
All advertising services were received during December 2015.
On December 20, BTown placed an order in the amount of $40,000 for essential parts to keep its
bus fleet in good working order. The order is fully cancellable and refundable without penalty.
The parts were delivered on January 5, 2016, terms 2/10, n/30. BTown realized on inspection of
the delivery that a box of gas filters was damaged and refused to accept this box. It was returned
to the supplier for a credit on the bill of $500. BTown paid the net amount owed to the supplier
on January 15. About half the parts were used for repairs in January, but BTown expects to use,
on average, $40,000 of parts per month when business stabilizes. BTown?s policy is to take all
purchase discounts and record purchases net of the discount. Further, BTown expenses all parts
On December 22, BTown purchases a 2 year liability policy effective January 1, 2016 at a cost of
$66,000 for the full two years.
BTown hired the aunt of the CFO (Aunt Martha) to pay the bills during the start-up phase,
November and December 2015. Martha is not a trained accountant but she is very meticulous in
her record keeping. Martha received a fixed payment for her work and was paid in full on
December 31 for her services, in the amount of $2500. Ted and Tim did not take any salary
during the start-up months and no dividends were paid.
On December 31, BTown paid utilities in the amount of $3000 and BTown owes accrued utilities
in the amount of $1000 on December 31. BTown owes $800 for office supplies purchased on
account on December 15. BTown expenses all office supplies. The bill for office supplies was
paid on January 10, 2016. The utility bill was paid again on January 31.
Effective January 1, a local CPA firm will be taking care of the write up work, paying bills, and
filing tax returns. Billings from the CPA firm will be $4,000/month, payable on the 15th day of
the following month. 2 Martha recorded all receipts and disbursements for the two months ended 12/31/15 in the cash
account ledger, duplicated below. The balance per the December 31, 2015 bank statement is
Cash Account, BTown Coach Service
November 1, 2015 through December 31, 2015
Check # Amount
Cash Balance Memo
From Ted -Common Stock
November 15 #101
November 30 #102
( 25,000) 375,000
( 1,000) 374,000
( 63,600) 310,400
Computer, Software, Service
December 22 #106
( 66,000) 244,400
Liability insurance policy
December 31 #107
( 3,000) 241,400
December 31 #108
( 2,500) 238,900
BTown began taking reservations and offering service on January 1, 2016, with the introduction
of 4 daily round trip reserved bus routes from Boston Logan Airport to Manchester, New
Hampshire. Tickets purchased on the bus on the date of the trip cost $65 round trip and $35 one
way. In order to encourage riders to purchase reserved seats in advance, a discount ($60 round
trip and $32 one way) is offered. The reservation must be made online using a credit card and
can be made up to 4 hours prior to the scheduled departure. Point of purchase tickets also must
be purchased with a credit card. Unused tickets can be used for up to one year at which time they
expire without a refund to the customer. Demand for the service was brisk and the following
chart records the sales activity in January:
Way Tickets Sold Advance Round Trip
Tickets Sold Point of Purchase One Point of Purchase Round
Way Tickets Sold
Trip Tickets Sold 2,000 1,000 1,000 1,100 BTown ran 3 round trips per day for each of the 31 days in January. All credit card sales are
settled on the day that the charge is processed and assume that all customer ticket purchases are
made via credit card. The credit card companies require a .5% fee on the day of the transaction.
All point of purchase one way and round trip tickets were used in January. Of the advanced sales,
1200 one way tickets were used in January and 800 round trip tickets were used in January. The
credit card fee is expensed as incurred since the tickets are not refundable.
On January 1, the CFO of BTown made arrangements with a local diesel fuel supplier for Diesel
Fleet Cards to be kept in each bus. The cards can be used at diesel stations in the region to
purchase diesel fuel at $2.90 per gallon, locked in for one year. The current price for diesel in the
New England market is $2.90 per gallon but it fluctuates quite a bit. BTown has committed to
3 purchase a minimum of 10,000 gallons of diesel fuel at the locked in price of $2.90 per gallon,
with a maximum amount of 30,000 gallons purchased at that price. BTown expects one round
trip to use about 30 gallons of diesel fuel, depending on the weather, traffic conditions and
weight of the bus. The cost of all fuel purchased on the Diesel Fleet Cards is settled every
evening, like a credit card, so it is essentially immediate payment to the diesel supplier. No diesel
fuel is stored and any left in the bus fuel tanks at the end of the day is immaterial. BTown has
adopted the policy of expensing fuel as purchased. During January, BTown purchased and paid
for 2900 gallons of gas all at the locked in price.
BTown has made a commitment to safety and hired experienced drivers through BusDrivers,
Inc., a company that trains drivers and covers their benefits and liability insurance. The agreed
upon fees depend on the route length with premiums paid when routes take longer than
anticipated for weather and traffic delays with the average payment to BusDrivers, Inc. per round
trip equal to $650. BusDrivers, Inc. bills BTown every Monday for the prior week (Monday
through Sunday) and BTown makes an immediate wire transfer. Wire transfers for January 2016
Date of Payment Dollar Amount January 4 $ 7,800 January 11 13,650 January 18 13,650 January 25 13,650 Phone service and internet service in the office and wifi on the buses is provided by a local
company at the cost of $1000 per month beginning January 1. The bill for January was received
on February 3 with terms n/10 and paid on February 13. Utilities used for the month of January
amounted to $3000, and a payment of $2500 was made on January 31.
BTown uses straight line depreciation for all productive assets, and follows USGAAP. Assume
all long-term assets purchased are placed in service on January 1, 2016. Ignore income taxes.
In March 2016, BTown made the following additional accounting decisions:
1. After reviewing the accounting treatment of their long-term assets on March 1st, 2016,
BTown changed the useful lives of the buses from 20 to 15 years and also now believes
that the buses will have a salvage value of $200,000 combined when fully depreciated.
Further, the building?s useful life has been reduced from 40 to 25 years.
4 2. BTown has contracted with a local construction company to build their small repair shop
(construction completed March 31, 2016). Construction costs incurred include the
following: Legal fees for drawing up the construction contract ($5,000), materials and
labor ($37,000), advance payments of property taxes for Summer 2016 ($4,000), State
registration fees ($500), and Architect fees for construction plans ($2,500).
3. On March 1st, BTown receives a bank statement for the period ending January 31, 2016.
The bank statement has an ending cash balance of $373,550. BTown performs a bank
reconciliation with these items: Outstanding checks ($20,500), January 31st cash deposits
not submitted to bank until February 1st ($11,000), Check written by BTown for $5,800
was recorded on the books at $8,500. The bank correctly deducted $5,800, Bank service
charges ($350), Check from customer included in book cash returned from bank due to
non-sufficient funds ($377).
4. Demand for the new bus service has been brisk since it is a cost effective way for college
students enrolled at a variety of colleges near Manchester, New Hampshire to travel back
and forth to Boston. BTown wants to tap into this market in other locations in New
England, and intends to expand to several additional geographic areas within the next six
months. BTown believes that the service will be even more popular if college students
can use a purchase interface to quickly purchase tickets with funds loaded on their
university student accounts, eliminating the need for a credit card. The CEO also
believes demand will be further enhanced if customers can track the location of buses via
an App. The CEO has hired a start-up company affiliated with a college in Boston to
create the purchase interface and a GPS locater App for a total fee of $100,000, to be
delivered for testing by the end of May. Development of the software is quite doable and
its use is expected to increase future revenue. The first progress payment of $20,000 was
made on March 31, 2016 for work performed to date to develop the software. The second
progress payment of $40,000 is due on April 30, and another $30,000 is due on May 31.
Testing of the software and determination of technological feasibility is expected to occur
in early May, with release of the App in late May, 2016. The last $10,000 is not paid until
the software has been running successfully for one month, or at the end the June 2016.
PART I ? DUE SEPTEMBER 20TH
1. Prepare all journal entries in good form for the two month period from November 1
through December 31, 2015. Please prepare any adjusting journal entries in chronological
order. The closing entry is not necessary.
2. Using the journal entries and the data provided by Martha, prepare an income statement,
for the two months ended December 31, 2015, and balance sheet at December 31, 2015.
3. Prepare all the journal entries in good form for January 2016, including any adjusting
journal entries. Record one revenue entry, one entry for the purchase of diesel fuel, and
one entry for the compensation to the bus drivers for the entire month.
4. Prepare an income statement for the month ended January 31, 2016, and a balance sheet
at January 31, 2016.
5. Calculate the net increase in Cash during the period from the date the company was
formed to the balance sheet date of January 31. How much of this increase came from or
5 was used by operating activities, how much from investing activities, and how much
from financing activities?
PART II ? DUE DECEMBER 1ST
1. Why is BTown?s method of accounting for parts inventory appropriate? Discuss.
2. How should BTown account for the software development costs? Show all appropriate
journal entries under GAAP. If BTown used IFRS instead of USGAAP, would the
accounting for the software be the same or different as of March 31, 2016? Explain.
3. BTown expects the Manchester routes to be at 85% capacity in February. Estimate net
income for February. Assume all tickets are round trip and 50% are advance tickets (50%
point of purchase) and that none of these 85% riders had a ticket before February (they all
purchased their ticket via credit card in February). BTown expects to continue to run only
3 round trips/day in February. In addition, consider all estimable expenses but assume
utilities, wi-fi, and parts used are the same as in January (use the same expense for both
4. Compute the new depreciation expense for the buses and building for the month of March
2016 and create the new journal entry for March 2016. What is the book value of these
assets as of March 31st, 2016?
5. What is the amount that BTown should capitalize (if anything) for the new repair shop
completed March 31st, 2016? If an amount should be capitalized, why does BTown
capitalize these expenditures as opposed to expensing them immediately?
6. Create a bank reconciliation for the month ended January 31st, 2016. Use your cash
balance from the balance sheet created in Part I, Question 4 above as your starting book
balance. What is the correct ending book cash balance? 6
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