Cool Taste Inc. (CTI) is a private corporation that manufactures and distributes Cool Taste juice products. Its products are all based on the "secret recipe" developed in the kitchen of the company's founder, Wendy Hobart.

It is now late August 2019 and you, CPA, have just completed a meeting with Wendy. Your firm, Ashby Cohen, is providing advisory services for CTI on several matters.

Wendy explained that in October 2018, CTI signed a long-term contract with a major discount chain, PriceCo Inc. The contract is effective August 1, 2019, to July 31, 2022, at which point it can be renewed with the agreement of both parties. CTI committed to supply a new line of aseptically packaged, shelf-stable products that do not require refrigeration (known as a drink box). Previously, CTI only manufactured products that required cold storage.

The new product line required upgrading and expanding CTI's manufacturing facilities. To obtain the financing for the upgraded manufacturing facility, CTI obtained a long-term bank loan, pledging the new manufacturing assets as collateral. CTI was also able to extend its current credit line due to its new contract with PriceCo.

Appendix I provides details on the events that occurred during the year.

To support ongoing growth and capital needs, CTI hopes to attract private equity investments in the near future, and Wendy knows these potential shareholders will be highly interested in CTI's profitability. She would therefore like your analysis and recommendations on accounting issues that will affect CTI's financial statements. CTI prepares its financial statements under accounting standards for private enterprises (ASPE) and has a July 31 year end. She would also like your thoughts on how the accounting department is running specifically, she would like to be made aware of its strengths and weaknesses (Appendix II), along with your recommendations on how to deal with any issues.

Appendix I

Events in the year

PriceCo contract

PriceCo has over 500 stores across North America. Each store also has a food court selling PriceCo-branded products. The long-term contract between CTI and PriceCo includes the following conditions (among others):

PriceCo will pay for all products ordered within 30 days of delivery.

The aseptically packaged products must have the same flavour and quality of the current refrigerated products produced by CTI. PriceCo has the right to refuse product or request revisions to the product if these terms are not met.

PriceCo agrees to purchase a minimum quantity of product during each year of the contract term (August 1 through July 31 each year). If the minimum quantity is not purchased, PriceCo must pay the difference ("take or pay") between what was ordered and the minimum purchase amount by August 31 each year. PriceCo can receive delivery of the unordered product, when requested, in the following year.

Due to the "take or pay" provision, CTI plans to record the minimum purchase amount as revenue in the 2020 financial statements, regardless of whether or not the purchase is made.

In early August 2019, PriceCo claimed that its first shipment of products did not have the same flavour and quality as the refrigerated products. Therefore, under the terms of the contract, PriceCo refused the first shipment of $300,000 of product and requested product revisions. In addition to this returned PriceCo product, CTI had an additional $200,000 of the product using the old recipe still in inventory that had yet to be shipped.

In mid-August, CTI reformulated a recipe that was acceptable to PriceCo.

Manufacturing facilities

In October 2018, CTI decided to expand its facility to accommodate the new aseptically packaged product line. The cost to expand and modify the plant was $6 million. The costs were all capitalized to the cost of the plant and included the following:

interest on the financing required

machinery necessary for the aseptic packaging process

$200,000 for the licence for the new food product line

The licence for the new food product line is issued annually by federal health inspectors for compliance with food safety regulations. The current licence expires in August 2020.

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Appendix I (continued)

Events in the year

Health-conscious product line

To meet changing customer demands, CTI developed a new process to develop a health-conscious product line during fiscal 2019, in addition to the PriceCo product. The new product is a soy cultured frozen dessert lactose-free, dairy-free, and dairy-protein-free for the vegetarian market. A recent study has indicated that this segment of the market is growing and there has been a 94% increase in demand for vegan and vegetarian options in recent years.

CTI has carefully tracked the costs incurred to modify recipes and develop the new product line. The total cost was $400,000 and CTI would like to capitalize the costs. This included test marketing to ensure the taste would meet CTI's quality standards. CTI hopes to introduce the new product in 2020.

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Appendix II

Accounting department

CTI's accounting department employs three staff members, each of whom has a computer:

1. Ms. Bellweather looks after sales. The company's truck drivers load their trucks every morning, with the shipper checking and signing for inventory loaded on the truck based on the order forms generated and printed from the automated order entry system. The truck drivers deliver product to the stores on their route, preparing invoices for the amounts delivered to each location. The original is left with the store and Ms. Bellweather receives copies signed by the store to acknowledge receipt of the product. The truck drivers return any excess inventory to the warehouse, with the shipper again signing for quantities returned to stock.

Ms. Bellweather records the invoices in a database, with each driver's total sales summarized by quantity and by dollar value. She then reconciles the quantities sold to the quantities loaded versus returned at the end of the day. Any discrepancies are followed up by the controller. Ms. Bellweather also reconciles cash received to the drivers' summaries that break out cash sales from sales on credit.

2. Ms. King maintains the accounts receivable sub-ledger, using a standard computer software package. She obtains a listing of credit sales from Ms. Bellweather on a daily basis and enters it into the receivable sub-ledger. She prints off a receivables listing on a weekly basis, which is then reconciled to the general ledger control account, with the reconciliation reviewed by the controller.

She also prepares the payroll input, with a bank payroll service used to prepare the direct deposits, payroll summary, source deduction remittances, and annual T-4 reporting. Ms. King reconciles each payroll summary to her input documents to ensure that the payroll is accurate and complete.

3. Mr. Dong maintains the accounts payable sub-ledger, again using a standard computer software package.

Mr. Dong also opens the mail and prepares a summary of cash receipts, which is provided to Ms. King for updating receivables. Mr. Dong then prepares the deposits and gives them to the president, who makes the deposits on a daily basis.

The general ledger is maintained by Mr. Dong on a software package purchased several years ago. Mr. Dong signs most of the cheques and reconciles the bank account every month.