TDA is a retail operation and has a calendar year-end

Company Background

TDA also known as “The Dude Abides….” is a locally-owned privately-held bowling anchored entertainment center located in a small liberal arts college town that hosts daily bowling, seasonal bowling leagues, parties, a gaming center and anything else that the owners can think of to get people to “roll” and spend money.  TDA has a kitchen (diner), the “Careful, man, there’s a beverage here” beer bar, and the “Mark it zero” specialty gift shop.  This location has 36,000 square feet with 20 lanes operating 14 hours a day 7 days a week. TDA has slowly developed a strong loyal customer base (especially on Thursday nights) with its personal attention to its customers’ unique entertainment/drinking needs.

TDA has been open for business for about a year and half.  The owners will be the first to admit they have learned some very expensive lessons along the way but are still very excited about the business’s potential.  Management wants to improve the overall customer experience by offering local live music in the beer lounge on Friday evenings (9 pm to closing) and by installing the latest high tech bowling scoring system which will automatically score the games without human intervention.  

You have been hired to be TDA’s Chief Financial Officer.  You are the accounting department which means you have to do everything.  Prior to your hiring, the firm used an accounting firm to prepare the books.  June’s financial statements must be prepared for the owners’ monthly meeting with the loan officer from the local bank.  The next meeting is scheduled the second week of July. 

Overview of Operations

  1. TDA is a retail operation and has a calendar year-end.
  2. Revenue Cycle – The firm has the following revenue streams:
    1. Cash sales at the bowling alley. There are two cash registers – one for the bowling alley and one at the bar. Cash receipts are deposited at the bank every night by the CEO and recorded on the books at the end of each week.  Venmo, PayPal, credit and debit card sales are treated as cash sales.  Beer sales are very significant to the bowling alley’s success.  Given that, the Dude and his closest friends have selected a short list of four of the most exquisite beers for the sophisticated beer drinking bowler – Blake’s Bloated Ale[1], a medieval classic, The Giant’s Hammer!, a sturdy scotch barrel stout, Forbidden Fruit, a tart yet sweet apple cider, and “Bring out yer Dead[2], truly a monster of a beer at 18.2% abv that only the strong can handle.
  • Rental Income
    • Diner Rent – All food services except for alcohol are outsourced to Smokey’s Over-the-Line Burgers.  Smokey’s provides a full service diner within the bowling alley.  All food service revenues and expenses are Smokey’s.   Terms of the lease are TDA receives at a minimum $2,500 rent by the 20th of the month plus a 1% override of Smokey’s gross sales from the prior month.
    • Cash Machine – Lapid, Inc. a firm owned by board member Bunny Lebowski pays TDA $300 a month for space rent.  Next month’s rent is by the 25th.  In other words, June’s rent is due by May 25th , etc.
    • Sales on Account.  The Dude remains popular through the years and has diversified his business with the “Mark it zero” gift shop.  The gift shop carries bowling league shirts, traditional bowling gear like bowling balls, shoes, bags, plus authentic “Dude” items such as autographed posters and pictures, personalized “Duder” bowling balls, and assorted memorabilia.  All sales on account pertain to the gift shop items only and are subject to credit terms 2/10, net 30.  Credit sales are recorded on the date of sale.  Bad debts expense is computed by using the percentage of net credit sales approach.
    • Gift Cards – What do you give someone who has everything?  A “Piece of Mind” gift card!  Cash is collected at date of the gift card sale, but revenue is earned when the gift card is redeemed.  Like the movie itself, the gift cards have no expiration date.
    • League Play and Parties – TDA policy for leagues and parties is to collect the money in advance and record the revenue earned when services are provided.
    • Gaming Revenues (video games, air hockey, etc.) – TDA entered into revenue-share agreement with the Brother Shamus Gaming Company.  TDA provides the space and electricity and Brother Shamus provides the games.  All game maintenance is the responsibility of Brother Shamus.  Revenues are split equally twice a month.
    • Any additional income or unusual revenue items are recorded when earned.
  • Expense Cycle – 
    • Inventory/Cost of Goods Sold.  TDA has two types of inventory – beer and gift shop items.
      • Beer – TDA buys its four beer options by the keg.  The Dude realized that buying by the keg is an environmentally and economically friendly way of serving a “fresh” beverage.  As any college student will tell you, the kegs are reusable and buying beer in larger volumes is cheaper (the Dude went to college, he didn’t graduate, but he went).  All beer is sold by the pint in unmistakable red solo cups with the Dude’s catch phrase – “the Dude abides” prominently displayed across the front.  TDA uses the FIFO inventory method for its beer inventory.
      • Gift Shop Inventory include all non-beer items sold to the public. TDA uses the “specific identification” methodbecause most items are custom ordered (bowling team shirts and bowling balls).  Merchandise is purchased on account from various local and national vendors, subject to their credit terms of 2/10, net 30.
      • Both inventories are subject to the lower of cost or market rules.  Inventory is physically counted on the last day of the month and accounting adjustments are made at month-end.
    • Sales Tax.  TDA is required to charge 6% sales tax on all beer and gift shop sales, but not on bowling rentals. The sales tax collected is recorded in the cash receipts journal and posted to account # 335 – Sales Tax Payable.  Due to the size of the company, TDA must pay the state Sales Tax Commission all tax collected by the end of the following month.
    • Payroll.  TDA has 12 hourly and 2 salary employees.  The salary or “exempt” employees are the CEO (the Dude) and the CFO (you).  The two-week pay period runs from Sunday to Saturday and paychecks are distributed the Wednesday following the end of the pay period.  The highest paid hourly employees are the two bartenders and the numerous part time bouncers whose job is to allow the underage college students access to the bowling alleys but not to drink!  All payroll taxes are remitted monthly to the respective taxing authorities, on the 20th day of the subsequent month.
    • All other expenses are recorded when incurred.
  • Asset Acquisitions/Disposals. Capital assets acquired are depreciated over their useful life using straight-line depreciation.  Depreciation on new acquisitions begins in the month the asset is placed into service. Assets disposed of are depreciated up until the month of disposal and any gain/loss on the disposal of fixed assets are recorded in the month incurred.
  • Capital Structure of TDA
    • Capital Stock – The firm was incorporated in the state of Michigan with an authorized capitalization of 20,000 shares of $1 par value common stock.  As of June 1 of Year X, there were 5,000 shares issued and 4,700 shares outstanding.  There were 300 shares of Treasury Stock which are recorded at cost.
    • Shareholders of record – As on June 1, the shareholders of record  and the number of shares owned are:
      • Jeffrey Lebowski  – 1,000 shares
      • Bunny Lebowski  –  700 shares
      • Jackie Treehorn –  1,000 shares
      • Walther Sobchak – 1,000 shares
      • Jimmy “Smokey” Gilmore – 500 shares
      • Donny Kerabatos – 500 shares

Mr. Lebowski, known by many as “The Dude”, is the CEO and Chairman of the Board of TDA.  All other shareholders are members of the Board of Directors, but are not employees of the firm, but you will see them every night having a good time at the bowling alley.  Ms. “Bunny” Lebowski, unrelated to Mr. Lebowski, is a professional actress and spokesperson for the local cash machine industry; Mr. Treehorn is successful producer of low-budget “cult films”; Mr. Sobchak, an alleged Vietnam veteran, is an adjunct Professor of Military Strategy at a local college; Mr. Gilmore is the cook/owner of Smokey’s Over-the-Line Burgers diner and Mr. Kerabatos is an unemployed professional bowler.

  • Dividends – Dividends are declared by the Board of Directors on the last day of each quarter and are paid 15 days following the quarter.
    • Mortgage – TDA has a 30-year mortgage with the Da Fino National Bank on the building which serves as the store front, office space, and personal living quarters for the owners.  $300,000 was borrowed fifteen months ago on January 2 and has an annual interest rate of 6.25%.  The mortgage payment of $1,847.15 is due on the 25th day of each month.
    • Promissory Note – TDA borrowed $40,000 from Uli Kunkel Savings & Loan. The firm signed a promissory note with the principal due in Year X+10; interest at the annual rate of 3.75% is accrued monthly, but paid on the last day of each calendar quarter.

Other Information:

Here is the calendar for June, Year X.  This can be useful in computing accruals (interest expense, payroll, etc.).

SundayMondayTuesdayWednesdayThursdayFridaySaturday
5/295/305/311234
567891011
12131415161718
19202122232425
26272829307/17/2

Here is additional information about the June 1st balances in the general ledger accounts listed below.

  1. Account # 115 “Accounts Receivable” – This is the summary account of the individual customer accounts listed on the “AR Detail Ledgers” worksheet.
  • Accounts #120 and #121 “Inventory – Beer and Inventory – Gift Shop” – These are the summary account of the individual inventory accounts (by part #) listed on the “Inventory Detail Ledger”.  There are two types of inventory – beer and gift shop items.  
  1. Beer is purchased by the keg which is .5 of a barrel.  Each keg has 15.5 gallons of beer which converts to 124 individual pints. 
    1. Bowling items like bowling shirts, trophies, and other bowling items are purchased as needed in order to keep down the costs.
  • Account #130 “Office & Store Supplies” – Represents office supplies (such as copier paper, printer supplies, letterhead and invoicing forms, etc.) that is stored in a locked closet controlled by the CFO and is “inventoried” or counted at month-end.
  • Account #140 “Prepaid Insurance” – In this account is the remaining balance of a $9,800 six-month liability insurance policy from Scamco Insurance Company. The policy period runs from February 1 through July 31 of this year.
  • Account #150  “Other Prepaid Expenses”  – This account has the following detail:
    • $1,000 down payment for another disappointing Detroit Lions season tickets for this year.  As a promotional device, the Lions will mail season ticket holders preprinted blue & silver “0-16”paper barf bags autographed by Jared Goff.
    • $300 for tickets for the Jesus Quintana Bowling Invitational Tournament to be held from June 21 through the 28th in Los Angeles.  The tickets are for Messrs. Lebowski, Sobchak, and Kerabatos.
    • The remaining balance is the firm’s advertising signage for the June 17-19 “Little Achievers” Kids bowling league tournament.
  • Account #200 “Long Term Investments” – This is a company-owned brokerage account with Flim, Flam, & Flum stock brokers.  The firm has invested in various common stocks, debt instruments, and mutual funds.  The firm receives monthly activity statements.
  • Account #300 “Accounts Payable” – This is the summary account of the individual vendor accounts listed on the “AP Detail Ledgers” worksheet.  The firm buys its beer on credit.  Credit terms are: beer purchase, net 10 and for gift shop purchases, 2% 10, net 30.
  • Account #320 “Income Tax Payable” – This is TDA’s estimated income tax due to the Internal Revenue Service and the State of Michigan for the month of May.
  • Account #330 “Interest Payable” – This account has $250.00 for interest expense accrued on the note payable.
  1. Account #335 “Sales Tax Payable” – This is TDA’s sales tax collected from customers in May payable in June.
  1. Account #350 “Unearned Revenue” – This account has 16 gift certificates @ $50/ sold in prior months but not redeemed by customer.
  1. Account #360 “Other Accrued Liabilities” – This account has the following detail:
    1. $500.00 to the law firm Upp & Yeurs for the firm’s legal needs in April and May.
    1. $785.47 unpaidMay expense report from Jeffrey Lebowski for his bowling ball research.
  1. Account #430 “Treasury Stock” – This account represents the dollar value of of the repurchased common stock from a shareholder.  A few years ago, the firm purchased 300 shares of its own stock from shareholder Bunny Lebowski for $3,200.  See capital structure information for more detail.

[1] In honor of the late William Blake, a British poet, who wrote about Albion in his epic poem Vala – The Four Zoas, I just snuck in a liberal arts moment here, didn’t I?

[2] A tip of my hat to Monty Python.  Drink one of these on an empty stomach and if you survive, you are worthy of being an accounting major.  Those of a weak constitution or those who claim to be a finance major should not attempt!