Jh Incorporated

Page 1 of 1

JH Incorporated

JH Incorporated (JH) operates a restaurant named “Good Stuff”, located in downtown Toronto. The sole shareholder, Jeff Heyd, is a successful international chef. After having trained as a sous-chef for several years in Europe, Jeff finally settled in Toronto and incorporated JH. Good Stuff was originally owned by another chef that was looking to retire. The restaurant officially re-opened for business on March 1st, 2012.

It is now March 18th, 2012 and you, a senior associate, have been asked by Mark White, a partner at Lyndon, Ritorto & Singh LLP to accompany him to a meeting with Jeff Heyd. During the meeting, Jeff mentions that JH’s financial statements for the December 31st, 2012 year end will need to be audited. An audit is required because Jeff is considering selling one-third of his shares in JH to a private investor for a price that will be determined based on the 2012 net income (before tax). The private investor wants to evaluate the potential for long term success for the restaurant before investing in JH. Jeff is excited at this prospect because the restaurant has been very successful since it re-opened its doors, and he believes he will be able to sell his shares at a significant premium once the 2012 fiscal year is complete.

At the conclusion of the meeting, Mark asked you to identify the accounting issues pertaining to the preparation of JH’s financial statements. He is concerned about the financial statements because JH only employs a part-time accountant who has limited financial reporting expertise. To help you address Mark’s request, you obtained information about JH’s financial statements and significant transactions to date (Exhibit 1).

Required

Discuss the financial reporting issue(s).

Exhibit 1

Excerpts