Question

Top Quality Food Ltd. (TQF) is a medium-sized private food-processing company founded more than twenty years ago by Ray Smith. TQF is located in Newmarket and mainly provides frozen chicken, pork, and beef products to grocery stores and restaurants in the greater Toronto area and its surroundings. Ray is the CEO and sole common shareholder of the company. In recent decades, consumers pursue healthy lifestyle and tend to eat less meat but more fruits and vegetables. In noticing this market trend, Ray decided to add a new product line to produce frozen fruits. Ray approached Meridian Credit Union in early 2020 for a long-term loan to finance its planned new product line. After carefully reviewing TQF’s business plan, Meridian agreed to finance the purchase of new equipments for the new product line in processing and packaging frozen fruits, and the new equipment will be used as the loan collateral. Meridian also imposes a debt to equity ratio of not more than 1 to 1 for the loan, and requires audited financial statements from TQF every year. Ray agreed to satisfy all of Meridian’s requests, and in the fall of 2020, he hired Sherman LLP as the auditor for TQF. As a staff accountant of Sherman, your supervisor asked you to take care of the TQF account. December 31, 2020 will be the first year end which TQF will be audited. TQF’s earnings in recent years have averaged $ 300,000. In a recent meeting with Ray, he asked you to comment on the relevant accounting policies regarding the transactions which you have noted below:

1. Ray used the money from issuing preferred share (as stated in 6b above) to help finance a $ 120,000 acquisition of common shares in Spring Farm (SF) that produces blueberry, strawberry, peach and cherry. TQF will now own 25% of SF. SF will be a primary supplier of those fruits mentioned above for TQF’s new product line. Ray explained: “this vertical integration is critical for the growth of our business! Otherwise I will have to pay about $ 10,000 more if I buy from other suppliers. This deal is a big help with cash flow, and it also helps us to secure the supply which can be volatile depending on the weather.”

Answer 1

First all we have to look at the situation from the auditors perspective of aquistions.

Company cquisitions are vital to company events that frequently carry notable threat to the companies.. One important threat concerns to the precision of financial reports of the combined companies. To address SF risks, auditors have to perform vital work during the acquisition year. Auditors need to confirm that reserves in the form of accruals and contingencies are precise and are not used to grow earnings in future periods. Similarly, holding up receipts recognition through put off revenues to future periods is another matter of concern for auditors. Importantly, auditors should confirm that the purchase price is precisely allocated to assets and liabilities as well as to assets.

This is also an advantageous in the expansion plans of TQF, as it wanted to expand its companies products. By acquring some stake in SF, they were able to add blueberry, strawberry, peach and cherry to product porfolio's. This will also help in saving the $10000 that other buyers would have charged.