CASE SIMULATION WEEK 2

Eastern Economic Development Corporation (EEDC), a local community-development office, operates a

program called Business Assistance Service (BAS). It is a mentorship service for entrepreneurs. EEDC
forms volunteer advisory boards of three to five knowledgeable business people with strengths in different
areas. The advisory boards are paired up with businesses requesting BAS. The service is available to
businesses within two to five years of inception and can be provided for up to five years. The volunteers
meet with the entrepreneurs on a regular basis and critique the business and offer suggestions for
improvement. All aspects of the business are considered: financial accounting, operational, strategic,
marketing, finance, tax, and human resources.

You are a CPA with Black and White, Chartered Professional Accountants. On July 30, 2016, you had
your semi-annual performance review with your partner, Bill Black. Bill noted that the firm values
community service and thinks that, now that your studying is over, you should do more of it. As a result,
you volunteered to become involved as a mentor with BAS. Bill thinks this will help you expand your
business knowledge, and make useful contacts with fellow volunteers and with budding entrepreneurs that
could become valuable clients. He said to come see him if you need help.

On August 5, you met with the volunteer board that you were assigned to. Your board has three other
members: a lawyer, a marketing professor, and a successful small-business owner. Your first “client,”
Security Plus Inc. (SP), operates a security business and is new to the BAS program. The volunteer board
met briefly and was given some information from a meeting the account manager at EEDC had with Joe
Rush, the owner of SP (Exhibit I) and some background information from SP’s application to the BAS
program (Exhibits II, III, and IV).

You are responsible for advising on the accounting and tax aspects of the business. This is important given
that EEDC requires the financial statements to be in accordance with ASPE. The other volunteers will
look at marketing, human resources, strategic, and operational issues. However, you are welcome to
contribute your views on these other areas. The volunteers will get together for a group discussion before
meeting with the client. You decide to consult with your partner on how to proceed. He suggests you draft
a memo summarizing your observations for the upcoming meeting.

Reprinted from the 2006 UFE Report, with permission Chartered Professional Accountants of
Canada, Toronto, Canada. Any changes to the original material are the sole responsibility of the
author and have not been reviewed or endorsed by the Chartered Professional Accountants of
Canada.
 EXHIBIT I

NOTES FROM THE MEETING WITH JOE RUSH

Joe thinks that, by the end of the current fiscal year, SP will have a large enough customer base to be
profitable. He anticipates that he will install at least 425 new home alarm systems in the current year due
to his competitive pricing. However, he noted that as profitability improves, it still seems that SP is often
short of cash, which concerns him and he would like your help in assessing his cash situation.

He is considering adding Health Alert, a service primarily for seniors who live alone. Customers would
press a button on a portable device to call for medical assistance. Joe wants advice on how to price this
service, both on its own and in combination with residential security. He would like to achieve the same
contribution margin on Health Alert as he does on the security service contracts. The monitoring of the
Health Alert service will be outsourced. Joe estimates that Health Alert’s incremental monitoring cost will
be $12 per customer per month. The portable device will cost approximately $30 and any installed
equipment will have to be reprogrammed. The reprogramming can be done in about 15 minutes but will
require a visit to the customer’s residence, so the estimated cost of installation, at $50 per hour, is $12.50.

SP’s office is in Joe’s home, and his wife often takes care of the administrative work. Joe also has a part-
time bookkeeper, Anna Sharp. Anna prepares SP’s financial statements and corporate tax return as well as
Joe’s personal tax return. Anna is a friend of Joe’s from college and does this work mostly as a favour.
However, she does receive a small monthly salary. Anna has always paid the installers as independent
contractors but is not sure this is the correct treatment.
 EXHIBIT II

EXCERPTS FROM THE BAS APPLICATION

Business name Security Plus Inc. (SP)

Date of inception June 1, 2014
Form of business Corporation
Registration Date for HST December 1, 2015
Owner(s) Joe Rush
Background of owner(s) Electronics Diploma, Eastern Memorial College, 2008; Warehouse
supervisor, Electronics Superstore 2008-2013
Products 1. Installation and monitoring of security systems for residential
and services customers. SP contracts with a national monitoring company to
do the actual monitoring services.

2. Sale of security products (e.g. locks, bolts, and alarms for houses
and cars). SP takes the orders and arranges for suppliers to ship
directly to the customer. SP does not keep any inventory of this
type. SP invoices and collects the money from its customers, and
pays the suppliers.
Additional Financial Attached (Exhibit III)
information
[Attach information on the
pricing of your products and/or
services]
Financial Statements for last Attached (Exhibit IV)
two years
 EXHIBIT III

ADDITIONAL FINANCIAL INFORMATION

1. Systems are advertised as free with a 36-month contract. If the contract is less than 36
months, the sales price of the system to the customer is $495. The same monthly rental fee of
$33 is charged regardless of whether the customer signs up for the 36-month contract or a
shorter period of time. Joe Rush noted the $33 monthly fee is in line with competitors’
monthly pricing. To date, all customers have taken the free offer.

2. In fiscal 2016, there were 325 new systems sold. This was an increase over fiscal 2015 where
150 new systems were sold.

3. The cost to SP of providing the free system is:

a. System material cost is $230 per system in fiscal 2016; it was $225 in fiscal 2015.
b. Installation is $100 per system. To date, Joe has done approximately half of the
installations himself at no cost to the company. Now that the sales volume has increased,
he expects to have to pay for a greater percentage of the installations.

4. Demand for the systems is constant throughout the year.

5. Gargantuan provides monitoring services for SP’s customers. The alarm monitoring expense
paid by SP was initially 15% of the monitoring revenue, but increased to 20% on January 1,
2016. This increase resulted in a combined rate of 17% of monitoring revenue for the year
ended May 31, 2016. SP does not have a long-term contract with Gargantuan.

6. Customers have the option of being billed monthly, quarterly, or annually, in advance. At the
present time, the majority of customers are on the monthly billing option.

7. The $10,000 balance owing on the loan from the Bank of Eastern Canada was at a 6% annual
interest rate and was repaid in 2016. A new loan was obtained from EEDC at an annual
interest rate of 5%. The loan from EEDC is to be repaid in two annual installments of $10,000
each. The first installment is due May 31, 2017.

8. Joe borrowed $70,000 personally and invested this in the form of equity.

9. Joe has income from other sources.

 EXHIBIT IV

SECURITY PLUS INC.

BALANCE SHEET
As at May 31

(unaudited)

2016 2015
Assets
Current assets
Cash $ -- $ 2,552
Accounts receivable 27,883
6,211
Accounts receivable – shareholder -- 10,000
Inventory (systems to be installed – estimated) 2,300 2,300
30,183
21,063

Computer 2,500
2,500
Accumulated amortization – computer (1,500)
(750)
1,000
1,750

Small tools 1,250

1,250
Accumulated amortization – small tools (750) (375)
500 875
Furniture and fixtures 3,320
3,320
Accumulated amortization – furniture and fixtures (1,992)
(996)
1,328
2,324
Liabilities
Current liabilities
Bank overdraft $ 2,150 $ --
Accounts payable 32,190 15,210
Payable to shareholder 19,000 --
HST payable 3,000 --
Corporate tax payable -- --
Other current liabilities 34,021 9,355
EEDC loan 20,000 --
Loan - Bank of Eastern Canada -- 10,000
 110,361
34,565
Shareholder’s equity

Common Shares 70,000

70,000
Deficit (147,350)
(78,553)
(77,350)
(8,553)
$ 33,011 $
26,012

EXHIBIT IV (continued)

SECURITY PLUS INC.

INCOME AND DEFICIT STATEMENT
For the year ended May 31

(unaudited)

2016 2015
Revenue
Monitoring services $ 123,750 $ 29,700
Security products 15,700 2,425
139,450 32,125

Expenses
System material 74,750 33,750
Alarm monitoring 21,038 4,455
Installer fees 16,000 7,000
Licenses and bonds 15,560 12,450
Cost of product sold 10,990 1,819
Vehicle lease 8,000 8,000
Advertising 6,450 3,597
Miscellaneous 6,018 5,450
Meals and entertainment 5,590 4,370
Vehicle fuel 4,500 3,400
Communication 4,450 4,230
Supplies 4,200 4,390
Office 3,340 2,973
Insurance 3,300 3,100
Interest and bank charges 3,120 2,420
Salaries 3,000 3,000
Vehicle repairs ` 2,500 400
Amortization 2,121 2,121
Bad debts 1,820 2,253
 Home office 1,500 1,500
Income tax -- --
198,247 110,678

Net loss 58,797 78,553

Deficit, beginning of period 78,553 --

Dividends 10,000 --

Deficit, end of period $ 147,350 $ 78,553