Issue # 2: All electric equipment's purchased the Sarah is sold after two years at half the

original cost. Hence Sarah wonders what the correct accounting treatment for high-end

technology is. (Assets were purchased a year ago)

Quantitative Analysis: We need to calculate the depreciation for answering the question:

      Straight Line Method          

Assets Quanti Purchas Total Rate of Accu present accumulat net The sale Pro
ty e price valu depreci mulat value ed value price fit
e ation ed depreciati after after 2 or
dep on n after two years loss
2 years years
virtual 2 700 1400 20% 280 1120 560 840 700 -140
reality
goggles
high- 1 600 600 20% 120 480 240 360 300 -60
definition
camera
MacBooks 2 1750 3500 20% 700 2800 1400 2100 1750 -350
Total   3050 5500   1100 4400 2200 3300 2750 -550
              4400      
      Diminishing and          
Declining Method
Assets Quanti Purchas Total Rate of Accu present net the sale Pro
ty e price valu depreci mulat value depreciati value price fit
e ation ed on in 2 after after 2 or
dep years two years loss
years
virtual 2 700 1400 20% 280 1120 224 896 700 -196
reality
goggles
high- 1 600 600 20% 120 480 96 384 300 -84
definition
camera
MacBooks 2 1750 3500 20% 700 2800 560 2240 1750 -490
Total   3050 5500   1100 4400 880 3520 2750 -770
            Total 1980      
depreciatio
n
Qualitative Analysis: We calculated the depreciation with two methods straight-line method and

the diminishing method. With the straight-line method, total loss on sale after 2 years comes to

$1100 whereas with the declining method it comes to $1540. As the assets purchased are more

useful in early life due to technological inventions, it is advised to use the declining method to

calculate depreciation. Moreover, Sahra should reduce the equity for the losses made on sale next

year.

 Incremental Analysis based on revenues driven from the cutting edge technology

incorporation.

Issue#3 Wheather extra investment worth pursuing more higher revenue jobs.

Quantitative analysis: In the first year, house tech completed 3 assignments out of 2/3, i.e., 20

assignments generated revenue of $6000, whereas the remaining 10 assignments involved Paul's

specialty items and generated $9000 revenue.

Calculation of cost of time= Total profit= 15000*30/100= $4500 (Profit to be divided between

Paul and Sahra). Profit per person =$2250.

Assumption1: Both Paul and Sarah worked for 8 hours a day and 30 days a month

Income per hour=2250/240= 9.37 Paul spent 4.5 hours per item. Total time spent = 25*4.5

=112.5 hours. Total cost= 112.5*9.37= 1054. Cost per assignment=$ 10.54

Cost calculation of Paul's business: $200 for material per item. He made 25 items, so the total cost

of material=25*200=$5000. Average cost per assignment= $5000/10=$500. Total cost per

assignment=500+10.54= $510.54

No. of Total Revenue Extra cost Profit Profit per

assignments revenu per item per margin assignment

e assignmen
 t
Assignments with 20 6000 300 --- 30% 90

Paul's items
Assignments 10 9000 900 510.54 30% 116.83

without Paul’s

items
Not sure if correct or not

Qualitative Analysis: As per the above quantitative analysis, they earn a higher profit if they use

Paul's specialty items in their assignments. The extra cost per assignment is 510.54. If we deduct it

from revenue per assignment, it comes to 389.46 (900-510.34 ). Hence the profit is higher when

used Paul's items.

Issue#4 Is it worth putting the extra cost on Advertisement?

Quantitative analysis: Advertisement cost= $2500

Expected number of new assignments=40

Increase in assignment=10

Increase in revenue:

No. of Revenue Total

assignments per item revenue

Assignments with 5 300 1500

Paul's items
Assignments without 5 900 4500

Paul's items
total 6000

Qualitative Analysis:
 #Issue 5: Whether they should buy or rent another house.

Quantitative analysis:

Buy a house Rent a House Avoid the house

1000 1000

Monthly Rental income

Mortgage or Rental -2000 -1250

Payment
Addditional expenses -500 -500
Increase in sales 1500 1500
Increase in values 3000 (30000/10) --
Total effect 3000 +750
(35% interest on average over ten years) did not take into account

Mortgage payment= x*35/100=1000=100000/35=2857.14

Qualitative Analysis: From the above quantitative analysis we can see that in both the cases they

will get benifiited. There current ratio is …. And there debt of equity ratio is ………There fore they

can easily get the mortgage approved. Moreover, they will get
Accounts & Observations-

 To calculate liquidity of the organization as they are planning for mortgage, we need to
calculate Working capital, Current ratio.

While Current liabilities are available - $3750, not able to locate current assets.

Assumption- Current assets $13500 (remaining count of piece made by Paul, each costing
$ 900)

If assumption of current asset is correct-

Current Ratio is $3.6 (13500/3750) which states good position of business to seek
mortgage

Working capital $9,750 (13500-3750) states company’s operational efficiency and short-
term financial health is in good state

Components of Current Liabilities-

2 virtual reality goggles $1,400

a high-definition camera $600
2 MacBooks $1,750

Questions to be solved?

1. journal entries on the equipment, including purchase, payment, annual usage, and
eventual sale. Danilo

2. He wonders if the extra money is worth pursuing more higher revenue jobs. Sonya and
Rodrigo

3. Guidance on correct and ethical accounting treatments on extending basement for

showcasing furniture and appliances. Danilo

4. Sarah is asking for your input on whether they should rent, buy, or avoid the house
altogether. Sonya
 5. What is the actual profit margin as Sarah estimates it is 30%, however realized
later, it doesn’t include Transport cost and may be few other costs? PnL Analysis
Rodrigo

6. Whether Sarah should sell assets every two years? For this, we need to figure out
if selling old assets incurred profit/loss and cost of new equipment (estimate)
Sonya

Journal Entries

Date Account titles and explanations Debit ($) Credit ($)

Virtual Reality goggles 1,400.00
Cash 1,400.00
(Being virtual reality goggles purchased)

Camera 600.00
cash 600.00
(Being high definition camera purchased)

Computers 3,500.00
Cash 3,500.00
(Being two computers purchased)

Cash (6000+9000) 15,000.00

Interior designing revenue 15,000.00
(Being revenue from interior designing business received)

Interior designing materials cost 5,000.00

Cash 5,000.00
(Being interior design material costs incurred)

Profit and loss account 5,000.00

Interior designing materials cost 5,000.00
(Being interior design material costs incurred)

Advertising expenses 2,500.00

Cash 2,500.00
(Being advertisement expenses paid)

Profit and loss account 2,500.00

Advertising expenses 2,500.00
(Being advertisement expenses paid)
 Cash 1,000.00
Rental income 1,000.00
(Being monthly rental income received)

Rental income 1,000.00

Profit and loss account 1,000.00
(Being rental income credited against profit and loss account)

Issue1

Revenues generation with a high conversion rate 95%

Profit is driven by revenues however, there are several implications to keep in mind aiming to
ensure the sustainability of the business in a midterm.

All resources needed need to be properly allocated to deliver the order on time. Most of the
activities are fully done by Sarah and Paul which could be a major risk in the quality service.

Workload

Contractors

Materials and others.

Issue 2

Hidden costs which are impacting negatively the HouseTech profitability.

There are several expenses which are not properly allocated in the Profit and loss analysis which
show a higher profitability than the real. i.e. vehicle expenses and professional accountant
services.

These items need to be included in the balance in order to show the real profitability.

It is quite probably that gross profit is below the 30% estimated.

Issue 3

Accounting treatment for the Accelerated Depreciation.

In order to keep the company in the edge of the technology, Sara and Paul decided to sell
everything after two years of use for half its original cost.

There are implications in regard to the tax structure and a potential benefit could be incorporated
in the analysis. However, an accelerated depreciation will impact negatively the profitability of the
business as Dpn expenses will be higher instead of running the life other assets in five years as per
standard accounting practice.

Issue 4

Revenues Generation

Analysis 1. Overhead Costs

Paul has some experience with building furniture, so he has started making tables and chairs
himself. House Tech completed 30 interior design engagements. Two-thirds of these were
engagements where all major pieces were purchased. On average, the revenues totaled $6,000 for
these jobs. The remaining third heavily involved Paul’s specialty items, resulting in higher revenue
of $9,000.

Paul estimates he spends $200 of material and 4.5 hours on average per piece. He believes he
made 25 pieces last year. By advertising $2,500 a month, the annual numbers could be increased
to 40 engagement.

20 Entry Level engagements, $6.000

10 Premium engagements, $9.000

25 pieces per year

Overhead hours: 4.5 hours x 25 pieces = 112.5 hours per year

Materials: 200 x 25 = $5.000

In this case there is not a budgeted overhead cost which impact the real profitability of the
business.

Analysis 2. Advertising to increase sales.

By advertising $2,500 a month, the annual numbers could be increased to 40 engagement.

Issue 5

Showroom
Sarah and Paul’s own basement was unfinished, so they did some work on it to create a similar
setup to IKEA. customers are invited to the basement to view and even try furniture and
appliances. Even though House Tech only recently started the practice, many customers have
purchased pieces on the spot and Paul later delivered them to their houses.

Issue here is about the real treatment of a spece to show the furniture and apliances aiming to
increase the revenues. These products will be manufactured by Pual. Hence these are the most
profitable product line defined for the analysis purpose as premium engagements.

Issue 6

Buy or Rent