Reference no: EM132788010

Romeo Esposito is the sole owner of Mama-Mia Pizza ("MMP") located in Guelph, Ontario. MMP has developed a strong reputation in the community for its authentic wood-fired pizza using a "secret sauce" recipe passed down from his grandmother Gianni from Naples, Italy.
The year 2020 has been a challenging year for this small business due to the global COVID-19 pandemic. The restaurant was closed for indoor dining for several months and revenues for the year were significantly lower than the prior year. In fact, all the months from March to December had revenues that were at least 40% lower than 2019, apart from July and August where revenues were 10% lower than the previous year due to outdoor dining.

You are the company's accountant and Romeo has asked for your advice on how to handle the following transactions for the December 2020 fiscal year under ASPE:

1. On April 1, 2020, MMP purchased 3 hand sanitizer stations for customers to use upon entry to the restaurant. These were purchased on account from China at a cost of $500 per station plus import duties of $35 per station. The company also incurred a flat rate shipping and handling fee of $85 to transport the goods. Each station is expected to have a 3-year useful life and a residual value of $50. The company expects the hand sanitizer stations to be used more frequently during the first year, thus has decided to the use the double- declining balance depreciation method.

2. The company qualified for two government financial support programs during the year. The deferral method is used to account for government grants.

Grant 1: On May 1, 2020, MMP received a government grant of $1,000 in cash to help with the unexpected costs of personal protective equipment (PPE). The company used the funds to help purchase plexiglass dividers to place between the tables in the restaurant. On June 1, 2020, 15 dividers were purchased at a cost of $100 each, paid on account. Romeo expects these plexiglass dividers will be used for 3 years with no residual value. He expects the benefit associated with these dividers to be realized equally over the 3 years.

Grant 2: MMP qualified for a wage subsidy program to cover 75% of eligible employee payroll costs incurred in 2020. The company can make a claim for up to 10 monthly "claim periods" from March to December. Eligibility is assessed each claim period and the company must demonstrate a drop of at least 15% in revenues over the prior year. There are no conditions attached to this grant. The company had 15 employees who were eligible for the program who earned $2,000 each per claim period. The journal entries to record payroll expense throughout the year have already been recorded as debits to "Salaries and Wages Expense". The company filed one application for all the eligible claim periods and received a reimbursement for the total eligible subsidy amount via e-transfer on December 31, 2020.

3. The company decided to start delivering pizza directly to customers' homes since indoor dining was shut down for a few months. On July 1, 2020, MMP traded one of its used pizza ovens to another local pizza shop in exchange for a used delivery van. MMP also paid $300 cash in the transaction. The fair value of the pizza oven at the time of the exchange was $9,000 and the fair value of the delivery van was $9,500; both numbers are reliably measured. The pizza oven was purchased on January 1, 2015 at a cost of $22,000. The pizza oven has been depreciated using the straight-line method over 8 years, using a residual value of $2,000.

• On July 15, 2020, $560 was paid in cash to a local mechanic for general repairs and maintenance on the new delivery van.

• The company decided that depreciation should be recorded on the van using the activity method using kilometers driven as the basis to estimate the pattern of benefits received by its use. At the time of the exchange, it was estimated that the van would last for another 40,000 km and it would have a $300 residual value at the end of its productive life. In 2020, the truck was used for 10,000 km to deliver pizza.

4. On August 1, 2020, the company paid $5,000 in cash to run a radio promotion to advertise its new home delivery service.

5. To supplement revenue, Romeo decided to start selling jars of its secret sauce to the public under the name "Mama-Mia's Secret Sauce". The company purchased a logo from a local graphic design company to use on the jars for $300. The logo was registered as a trademark for $250 plus legal fees of $180. While the trademark has a legal life of 15 years, the company intends to renew the trademark registration indefinitely as Romeo believes the trademark will provide benefits for an indefinite amount of time

Required:

Start this question on a new page. Show all calculations and analysis to get full marks. Round all numbers to the nearest dollar.

Problem a) Prepare all necessary journal entries and adjusting journal entries for the 2020 fiscal year.

Problem b) Romeo has asked you if there is a way to capitalize the value associated with his "strong reputation" on his balance sheet. He feels this is one of his most significant assets and knows his business would not have survived the pandemic so far without the support from his strong customer base. His cousin who is a CPA told him something about intangible assets needing to be "identifiable" in order to capitalize them. He is not sure what this means and wants you to explain this to him. Prepare a response to Romeo using relevant guidance as appropriate to support your answer.