Core 1 — Integrated Problem 8

Scenario (120 minutes)

Solstice Fitness Co. (Solstice) is a privately-owned chain of high-end fitness clubs

offering a range of services and amenities to its members, including state-of-the-art
fitness facilities, group fitness classes, and luxury spa treatments. In an effort to further
expand its range of offerings, Solstice acquired 100% of the shares of Onyx Health Bar
(OHB) on January 1, 2021. OHB is an oxygen and IV-drip bar offering customers
flavour-enhanced oxygen and vitamin IV infusions, which have been shown to boost the
immune system, reduce stress, and enhance alertness.

OHB’s services are a perfect fit with the high-end, health-conscious image promoted by
Solstice. While OHB currently has only one stand-alone location in Toronto, Solstice
intends to eventually incorporate OHB-branded oxygen and IV-drip bars in all of its
fitness clubs across Canada.

It is now February 16, 2021. You, CPA, are a senior financial analyst at Solstice, and
the controller, Jennifer Lee, has asked for your help dealing with a few issues she has
noted since the acquisition. Solstice and OHB are still in the process of integrating their
financial reporting systems. While Solstice has established financial reporting processes
and systems controls in place, Jennifer is skeptical about the manual processes in place
at OHB. Both Solstice and OHB apply accounting standards for private enterprises
(ASPE).

Task #1

Jennifer’s first concern is that OHB is not accounting for its capital assets correctly. She
asks you to meet with Robyn Worth, who has been responsible for most of the record
keeping at OHB since it was founded in January 2019. At your meeting, Robyn shares
the following:

“Capital assets at OHB consist mainly of the equipment and machines used to
administer oxygen and IV vitamin infusions to our customers. I track all of the assets
and their accumulated depreciation in an Excel spreadsheet, where I depreciate the
machines and equipment over their useful lives.

“We pay an external party to service the oxygen machines on a quarterly basis. This
ensures their continued cleanliness and functionality. The service provider makes
regular maintenance visits and special service calls if need be. For example, if one of
the oxygen concentrators stops working, we just call the service provider and they will
Chartered Professional Accountants of Canada, CPA Canada, CPA
are trademarks and/or certification marks of the Chartered Professional Accountants of Canada.
© 2021, Chartered Professional Accountants of Canada. All Rights Reserved.

Les désignations « Comptables professionnels agréés du Canada », « CPA Canada » et « CPA »

sont des marques de commerce ou de certification de Comptables professionnels agréés du Canada.
© 2021 Comptables professionnels agréés du Canada. Tous droits réservés.
2020-10-07
Core 1 — Integrated Problem 8 Problem

ensure it’s back up and running right away. For this, we pay a flat quarterly fee, plus the
cost for any additional replacement parts required. So far, there have been no charges
above the flat quarterly fee. I include the costs in the fixed assets register and
depreciate them along with the rest of the equipment.”

Perform an analysis of OHB’s treatment of the quarterly service fees to determine

whether it is in accordance with ASPE.

Your response should be no longer than half a page.

Task #2

At your meeting with Robyn, she also provided you with an excerpt from OHB’s fixed
asset register (Appendix I).

Assuming the service provider fees should not be capitalized, provide Robyn with the
required adjusting journal entry, and provide your supporting analysis in Excel. Hint:
Note that filtering has been enabled in each column.

Your response should be no longer than half a page, excluding any Excel files.

Task #3

Jennifer has asked that you review and provide feedback on the fixed asset register
prepared and maintained by Robyn. She would like to be made aware of any concerns
you have regarding the quality of the data and the impact it will have on the business.

For any issues that you identify, discuss the implications and provide recommendations
to address these issues.

Your response should be no longer than two pages.

Task #4

Jennifer has indicated that she would eventually like to integrate OHB’s manual system
for accounting for property, plant, and equipment with Solstice’s automated system.
Details on the two systems and the integration plan are included in Appendix II. Identify
any risks that may exist related to the integration of the two systems and, where
possible, provide recommendations to alleviate these risks.

Your response should be no longer than one and a half pages.

2/6
Core 1 — Integrated Problem 8 Problem

Task #5

Jennifer’s final area of concern is with the monthly internal reporting prepared by OHB.
Jennifer had asked Robyn to prepare a summary of OHB’s financial results in its first
month following the acquisition. She was surprised when Robyn provided her with a
page filled with several colourful visualizations (Appendix III), as this is not the type of
internal reporting she is used to seeing. To save time, Jennifer has asked that you help
her interpret the meaning of these images.

Interpret the financial results provided in Appendix III, identifying any areas of concern
that should be brought to Jennifer’s attention.

Your response should be no longer than one page.

Task #6

Please complete a survey on your experience in Core 1, located in the link below, and
submit a screenshot of the survey completion page with your integrated problems
(example screenshot provided below). Grades are given for survey completion.

https://www.surveymonkey.com/r/PEPCore1ModuleE

3/6
Core 1 — Integrated Problem 8 Problem

Appendix I
Fixed assets register

In D2L, download the Excel document “Integrated Problem – Appendix”

(CO12101E_IP08_Appendix_I).

4/6
Core 1 — Integrated Problem 8 Problem

Appendix II
System integration

OHB system

Robyn maintains a schedule of property, plant, and equipment in an Excel document on

her laptop. When a fixed asset is purchased, Robyn manually adds it to the schedule,
and a formula is used to calculate the monthly depreciation to be taken on each asset.
Based on this, Robyn prepares monthly journal entries to record new additions,
disposals, and depreciation on the fixed assets.

Solstice system

Solstice maintains a fixed asset register within its customized cloud accounting system,
AirTrack. Details of additions and disposals are entered manually into the system but
require electronic approval from a secondary reviewer who compares the entry to an
electronic copy of the original invoice. Monthly depreciation is automatically calculated
by the system using the straight-line method over the useful life recorded at the time of
the addition. The system prepares and posts an automated journal entry to record the
depreciation each month.

Conversion plan

Robyn will send staff from the Solstice IT department a copy of OHB’s records. The IT
staff will then manually enter the data into the AirTrack system, where the assets will be
tagged with different company numbers to differentiate between Solstice and OHB
assets. As it would be time-consuming to have someone review each new record, the IT
staff will override the system controls to mark the OHB asset additions as reviewed and
approved when entered. All assets will be entered at their carrying value on the date of
entry. Going forward, AirTrack will automatically calculate depreciation for both the OHB
and Solstice assets. Once all of the data has been entered, IT will give Robyn approval
to delete the original records from her laptop.

5/6
Core 1 — Integrated Problem 8 Problem

Appendix III
OHB financial results — January 2021

Income Statement by Line Item

80,000
60,000
40,000
20,000
-
(20,000) Sales Cost of sales Gross profit Selling, Depreciation Interest Net income
general &
admin
expenses

12-Month average January 2021

Expenses as a % of Sales - 12-Month Expenses as a % of Sales - January

Average 2021

Cost of sales Cost of sales

Selling, general & admin expenses Selling, general & admin expenses
Depreciation Depreciation
Interest Interest

12-Month Trend in Sales & Cost of Sales

70,000
60,000
50,000
40,000
30,000
20,000
10,000
-

Sales Cost of sales

6/6