Bluewater Deli (BWD) was founded by Lisa and Robert, who are brother and sister, and began as a small, local deli in Kenora. BWD sells fresh sandwich, soups, pastries and salads. Based on strong reviews through various social media source, Lisa and Robert have decided to expand operations within the Thunder Bay area.

As part of the expansion plans, all of the assets were rolled over into a newly formed corporation that has a fiscal year-end of December 31, 2018. The corporation issued 50,000 shares to each of Lisa and Robert for $3 per share. Upon incorporation, BWD also received a 10-year, 9% $250,000 loan with annual payments from the Thunder Bay Bank of Commerce to help finance the expansion. During their first year of operations, Lisa and Robert decided to hire Lento & Lento LLP (L&L) to help develop accounting policies that are consistent with ASPE for various new transactions. You, a senior accountant with L&L, have been assigned to the BWD file and met with Lisa and Robert to discuss the various new issues. Lisa and Robert have provided you with the following information regarding the new issues:

1.

On January 1, BWD purchased a new roaster over. The purchase was financed though an interest-free five year Vendor-Loan, whereby BWD is required to pay back $5,000 in each year. Lisa and Robert are excited about this financing promotion because they would have to pay 9% interest to borrow the money from the bank. Lisa and Robert recorded an asset and liability at $25,000. BWD uses the straight-line method to amortize the asset, which has a seven year useful life.

2.

To help finance their expansion into Thunder Bay, BWD issued 10,000 preferred shares to a group of private investors within their family for $10 per share. The preferred shares carry a 10% annual, cumulative dividend yield and are redeemable by BWD. The dividend rate was issued at such a high level because BWD does not have access to any other sources of capital in the current year. In 5 years, the dividend is expected to double. Given that they are preferred shares and not retractable, Lisa and Robert recorded these shares as equity.

3.

On August 1, the company reacquired and cancelled 1,500 of each of Lisa and Roberts shares at $4 per share. All 3,000 shares were re-issued to Melissa, a long-time friend, at a price of $5 per share. Lisa and Robert were unsure of how to account for these transactions.

4.

Given the volatility of commodity prices, BWD has locked the price of 100,000 kg of wheat at $0.75/kg. Upon its inception, BWD did not have to put forth any cash. All cash transfers will take place on settlement. As at December 31, the price of wheat is trading on the Chicago Board of Trade at $0.87/kg. Lisa and Robert have made no entries at year-end and will record the cost of goods sold with a wheat price $0.75 in the next fiscal year.

5.

BWD implemented a customer loyalty program. Each customer receives 1 Fresh Point for every large sandwich that they purchase. A customer receives a free large sandwich once they earn 10 Fresh Points. A large sandwich sells for an average of $5 and costs an average of $3 to produce. As of year-end, a total of 23,500 Fresh Points were issued. Lisa and Robert did not know how to account for this program and stated that they will record the expense of the free sandwich when a customer redeems their Fresh Points. Fixed costs are approximately 20% of gross margin. To protect their investment, Thunder Bay Bank of Commerce has included a restrictive covenant whereby BWD cannot have a debt-to-equity ratio in excess of 1:1. Upon inception, the debt-to-equity ratio is 0.83:1. Both Lisa and Robert have expressed their pleasure with the debt-to-equity ratio. The partner has asked that you prepare a report that helps Lisa and Robert understand the accounting implications of the above noted transactions as at year-end.