Kendal Hills Farm Inc. Kendal Hills Farm Inc. (\"Kendal\"), is a small farm outside of Orono, Ontario. Kendal is where Emily Kranenburg grew up as her parents raised game birds. Emily left the farm to obtain her business degree and was working in the accounting department of a not-for-profit organization. Out of production for about 20 years, she returned to the farm in 2016 with her husband Dave Kranenburg in order to revive it as a significant agricultural operation. Dave and Emily Kranenburg are the owners and operators of Kendal. While the company is small and currently reports under ASPE, there are plans to take the company public. Kendal has a June 30th year end and it is currently July, 2020. Emily and Dave have approached you, a CPA with a local CPA firm, to advise on some accounting issues that arose during the year: 1. Equipment purchase Agricultural equipment with a useful life of 10 years was purchased from a U.S. supplier for US$200,000 in May, 2020. At the time, the exchange rate in effect was US$1 = C$1.22 and the equipment and associated payable were recorded at $244,000. At year end, the payable was still outstanding and both it and the equipment were still recorded at $244,000.The year-end exchange rate was US$1 = C$1.32. Emily is not sure if either the initial or year-end amounts were recorded correctly, but she would like to get a better understanding of how to account for this transaction, as she expects Kendal will engage in more transactions with U.S. suppliers in the future. 2. Securities purchase (Profit Loans and Savings) In March, Kendal purchased Profit Loans and Savings (Profit) securities, which are listed on the Toronto Stock Exchange with excess cash. Profit was selected as a good investment based on its history of dividends and analyst predictions for capital appreciation in the short term. Unfortunately, Profit has dropped in value since it was acquired due to the slowdown in the housing market and recent government policy changes requiring larger down payments for first-time homebuyers. These investments were acquired with the intention of selling them in the short term if price increased. Number of Profit shares acquired 1,500 shares Number of Profit shares issued 100,000 shares Acquisition cost $22/share Fair market value at June 15 $18.95/share Note: Assume that the fair market value will not fluctuate from June 15 to June 30. As Kendal has never made this type of investment before Emily did not know the accounting options available and which journal entries should be made at acquisition and at year end. 3. Share purchase (Hardware Boss) On August 1, 2019, Kendal paid $40,000 for a 25% interest in the common shares of Hardware Boss Inc. (HBI). HBI is one of Kendal's main suppliers of farm hardware. Emily and Dave were very keen to acquire HBI shares as it was viewed as a \"wise strategic move.\" Emily and the farm manager for Kendal have been appointed to the board of directors of HBI. The remaining HBI shares are held by the founder and president of HBI. The journal entry recorded related to this acquisition was: Investment in HBI 40,000 Cash 40,000 HBI has a June 30th year end and reported net income of $140,000 for 2020, which is its typical profit level. Emily is not sure if this investment is being accounted for appropriately. She would like to account for the investment in a way that makes the Kendal financial statements \"look good\" for the potential public offering. 4. Share purchase (Green Circle Food Hub) The Green Circle Food Hub (\"GCF\") Inc. was a company formed by local farmers many years ago. Emily and Dave discussed the rising demand for local, seasonal food with GCF and on July 1, 2019 acquired 90% of the outstanding common shares of GCF for $90,000 cash. (Exhibit I). The company was inactive but in the early days of the pandemic, out of the tremendous need for collaboration and cooperation between farmers and homes, GCF ramped up operations. It started with a few farmers working together to sell each other's food and deliver to homes through no-contact delivery. Kendal had the facilities (fridge storage, freezer storage & dry storage) to serve as a collection point for food. The purpose for the Green Circle Food Hub is to serve farmers, homes and the environment For Homes: Increases access to the best, seasonal food from small producers. Provides a direction connection to the people growing and making your food For Farmers: It allows farmers & producers to set the prices for their food. Normally, farmers are pricetakers and are forced to accept very low prices for their food from wholesales and distributors. Increases the amount of time they spend on the farm by reducing the time they spend on the highways and at markets delivering and selling their food For the Environment: Reduces the amount of vehicles on the road. Instead of 40 vendors making 40 deliveries to the same 40 locations, it's one vehicle. Reduces packaging Reduces food waste All statements as at June 30, 2020 for both Kendal and GCF are provided in (Exhibit II) and details of intercompany transactions are provided in (Exhibit III). Emily lets you know that the bank has requested \"consolidated\" financial statements for Kendal to approve a loan Emily and Dave recently requested. Emily does not remember these chapters from her advanced financial reporting class and requests that you prepare the necessary financial statements as of June 30, 2020 for the bank. You agree to provide an analysis of the issues raised, including providing accounting advice, journal entries, and preparing financial statements as required by 11:59 pm on August 1, 2020 through SafeAssign in Blackboard. Exhibit I Kendal acquired 90% of the outstanding common shares of GCF for $90,000 cash on July 1, 2019. On that date, the equipment had a remaining useful life of 8 years from the date of acquisition. GCF's trademark is estimated to have a remaining life of 5 years from the date of acquisition. GCF's bonds mature on July 1, 2039. The inventory was sold following the acquisition. Both companies use straight line amortization, and no salvage value is assumed for assets The balance sheets of both companies, as well as GCF Hub's fair values on the date of acquisition are shown below: Kendal GCF Hub Inc. GCF Hub Inc. (carrying value) (carrying value) (fair value) Cash $400,000 $5,000 $5,000 Accounts Receivable $240,000 $30,000 $30,000 Inventory $60,000 $30,000 $60,000 Investment in GCF Hub Inc. $90,000 $25,000 $20,000 Land $20,000 $20,000 Trademark $10,000 $15,000 Equipment (net) $160,000 Total Assets $950,000 $120,000 Current Liabilities $500,000 $50,000 $50,000 Bonds Payable $120,000 $20,000 $30,000 Common Shares $200,000 $30,000 Retained Earnings $130,000 $20,000 Total Liabilities and Equity $950,000 $120,000 Exhibit II The following are the financial statements for both companies for the fiscal year ended June 30, 2020 Sales Dividend and investment income Kendal Inc GCF Hub Inc. $290,750 $125,000 $8,600 Less: Expenses: Cost of Goods Sold $200,000 $19,000 Depreciation $10,000 $25,000 Interest Expense $16,000 $36,000 Other Expenses $5,000 $28,000 $- $(8,000) $68,350 $25,000 Gain on Sale of Land Net Income Retained Earnings Statements Kendal Inc GCF Hub Inc. $130,000 $20,000 $68,350 $25,000 Dividends $(12,000) $(4,000) Balance, June 30, 2020 $186,350 $41,000 Balance, July 1, 2019 Net Income Balance Sheets Kendal Inc. GCF Hub Inc. Cash/investments $190,950 $156,000 Accounts Receivable $172,000 $150,000 Investment in GCF Hub Inc. $90,000 Inventory $100,000 $30,000 Equipment (net) $350,000 $25,000 Land $28,000 Trademark $10,000 Total Assets $930,950 $371,000 Current Liabilities $424,600 $280,000 Bonds Payable $120,000 $20,000 Common Shares $200,000 $30,000 Retained Earnings $186,350 $41,000 Total Liabilities and Equity $930,950 $371,000 Exhibit III Additional information: 1. Both companies use a FIFO system, and GCF Hub's entire inventory on the date of acquisition was sold during the following year. 2. On December 31, 2019, GCF Hub Inc. borrowed $20,000 from Kendal Inc. at 10% interest to finance its operations. Interest has been accrued but both the loan and interest remain unpaid at June 30, 2020. 3. GCF Hub sold the land to Kendal during the year for $28,000. 4. Kendal uses the Cost Method to account for its investment in GCF Hub Inc. 5. Each year, goodwill is evaluated to determine if there has been a permanent impairment. Goodwill impairment for 2020 was determined to be $7,000. 6. During 2020, Kendal sold merchandise to GCF Hub for $10,000. There is 60% of inventory on hand at June 30, 2020 and Kendal has a gross profit as a percentage of sales of 25%. Kendal Hills Farm Inc. Kendal Hills Farm Inc. (\"Kendal\"), is a small farm outside of Orono, Ontario. Kendal is where Emily Kranenburg grew up as her parents raised game birds. Emily left the farm to obtain her business degree and was working in the accounting department of a not-for-profit organization. Out of production for about 20 years, she returned to the farm in 2016 with her husband Dave Kranenburg in order to revive it as a significant agricultural operation. Dave and Emily Kranenburg are the owners and operators of Kendal. While the company is small and currently reports under ASPE, there are plans to take the company public. Kendal has a June 30th year end and it is currently July, 2020. Emily and Dave have approached you, a CPA with a local CPA firm, to advise on some accounting issues that arose during the year: 1. Equipment purchase Agricultural equipment with a useful life of 10 years was purchased from a U.S. supplier for US$200,000 in May, 2020. At the time, the exchange rate in effect was US$1 = C$1.22 and the equipment and associated payable were recorded at $244,000. At year end, the payable was still outstanding and both it and the equipment were still recorded at $244,000.The year-end exchange rate was US$1 = C$1.32. Emily is not sure if either the initial or year-end amounts were recorded correctly, but she would like to get a better understanding of how to account for this transaction, as she expects Kendal will engage in more transactions with U.S. suppliers in the future. 2. Securities purchase (Profit Loans and Savings) In March, Kendal purchased Profit Loans and Savings (Profit) securities, which are listed on the Toronto Stock Exchange with excess cash. Profit was selected as a good investment based on its history of dividends and analyst predictions for capital appreciation in the short term. Unfortunately, Profit has dropped in value since it was acquired due to the slowdown in the housing market and recent government policy changes requiring larger down payments for first-time homebuyers. These investments were acquired with the intention of selling them in the short term if price increased. Number of Profit shares acquired 1,500 shares Number of Profit shares issued 100,000 shares Acquisition cost $22/share Fair market value at June 15 $18.95/share Note: Assume that the fair market value will not fluctuate from June 15 to June 30. As Kendal has never made this type of investment before Emily did not know the accounting options available and which journal entries should be made at acquisition and at year end. 3. Share purchase (Hardware Boss) On August 1, 2019, Kendal paid $40,000 for a 25% interest in the common shares of Hardware Boss Inc. (HBI). HBI is one of Kendal's main suppliers of farm hardware. Emily and Dave were very keen to acquire HBI shares as it was viewed as a \"wise strategic move.\" Emily and the farm manager for Kendal have been appointed to the board of directors of HBI. The remaining HBI shares are held by the founder and president of HBI. The journal entry recorded related to this acquisition was: Investment in HBI 40,000 Cash 40,000 HBI has a June 30th year end and reported net income of $140,000 for 2020, which is its typical profit level. Emily is not sure if this investment is being accounted for appropriately. She would like to account for the investment in a way that makes the Kendal financial statements \"look good\" for the potential public offering. 4. Share purchase (Green Circle Food Hub) The Green Circle Food Hub (\"GCF\") Inc. was a company formed by local farmers many years ago. Emily and Dave discussed the rising demand for local, seasonal food with GCF and on July 1, 2019 acquired 90% of the outstanding common shares of GCF for $90,000 cash. (Exhibit I). The company was inactive but in the early days of the pandemic, out of the tremendous need for collaboration and cooperation between farmers and homes, GCF ramped up operations. It started with a few farmers working together to sell each other's food and deliver to homes through no-contact delivery. Kendal had the facilities (fridge storage, freezer storage & dry storage) to serve as a collection point for food. The purpose for the Green Circle Food Hub is to serve farmers, homes and the environment For Homes: Increases access to the best, seasonal food from small producers. Provides a direction connection to the people growing and making your food For Farmers: It allows farmers & producers to set the prices for their food. Normally, farmers are pricetakers and are forced to accept very low prices for their food from wholesales and distributors. Increases the amount of time they spend on the farm by reducing the time they spend on the highways and at markets delivering and selling their food For the Environment: Reduces the amount of vehicles on the road. Instead of 40 vendors making 40 deliveries to the same 40 locations, it's one vehicle. Reduces packaging Reduces food waste All statements as at June 30, 2020 for both Kendal and GCF are provided in (Exhibit II) and details of intercompany transactions are provided in (Exhibit III). Emily lets you know that the bank has requested \"consolidated\" financial statements for Kendal to approve a loan Emily and Dave recently requested. Emily does not remember these chapters from her advanced financial reporting class and requests that you prepare the necessary financial statements as of June 30, 2020 for the bank. You agree to provide an analysis of the issues raised, including providing accounting advice, journal entries, and preparing financial statements as required by 11:59 pm on August 1, 2020 through SafeAssign in Blackboard. Exhibit I Kendal acquired 90% of the outstanding common shares of GCF for $90,000 cash on July 1, 2019. On that date, the equipment had a remaining useful life of 8 years from the date of acquisition. GCF's trademark is estimated to have a remaining life of 5 years from the date of acquisition. GCF's bonds mature on July 1, 2039. The inventory was sold following the acquisition. Both companies use straight line amortization, and no salvage value is assumed for assets The balance sheets of both companies, as well as GCF Hub's fair values on the date of acquisition are shown below: Kendal GCF Hub Inc. GCF Hub Inc. (carrying value) (carrying value) (fair value) Cash $400,000 $5,000 $5,000 Accounts Receivable $240,000 $30,000 $30,000 Inventory $60,000 $30,000 $60,000 Investment in GCF Hub Inc. $90,000 $25,000 $20,000 Land $20,000 $20,000 Trademark $10,000 $15,000 Equipment (net) $160,000 Total Assets $950,000 $120,000 Current Liabilities $500,000 $50,000 $50,000 Bonds Payable $120,000 $20,000 $30,000 Common Shares $200,000 $30,000 Retained Earnings $130,000 $20,000 Total Liabilities and Equity $950,000 $120,000 Exhibit II The following are the financial statements for both companies for the fiscal year ended June 30, 2020 Sales Dividend and investment income Kendal Inc GCF Hub Inc. $290,750 $125,000 $8,600 Less: Expenses: Cost of Goods Sold $200,000 $19,000 Depreciation $10,000 $25,000 Interest Expense $16,000 $36,000 Other Expenses $5,000 $28,000 $- $(8,000) $68,350 $25,000 Gain on Sale of Land Net Income Retained Earnings Statements Kendal Inc GCF Hub Inc. $130,000 $20,000 $68,350 $25,000 Dividends $(12,000) $(4,000) Balance, June 30, 2020 $186,350 $41,000 Balance, July 1, 2019 Net Income Balance Sheets Kendal Inc. GCF Hub Inc. Cash/investments $190,950 $156,000 Accounts Receivable $172,000 $150,000 Investment in GCF Hub Inc. $90,000 Inventory $100,000 $30,000 Equipment (net) $350,000 $25,000 Land $28,000 Trademark $10,000 Total Assets $930,950 $371,000 Current Liabilities $424,600 $280,000 Bonds Payable $120,000 $20,000 Common Shares $200,000 $30,000 Retained Earnings $186,350 $41,000 Total Liabilities and Equity $930,950 $371,000 Exhibit III Additional information: 1. Both companies use a FIFO system, and GCF Hub's entire inventory on the date of acquisition was sold during the following year. 2. On December 31, 2019, GCF Hub Inc. borrowed $20,000 from Kendal Inc. at 10% interest to finance its operations. Interest has been accrued but both the loan and interest remain unpaid at June 30, 2020. 3. GCF Hub sold the land to Kendal during the year for $28,000. 4. Kendal uses the Cost Method to account for its investment in GCF Hub Inc. 5. Each year, goodwill is evaluated to determine if there has been a permanent impairment. Goodwill impairment for 2020 was determined to be $7,000. 6. During 2020, Kendal sold merchandise to GCF Hub for $10,000. There is 60% of inventory on hand at June 30, 2020 and Kendal has a gross profit as a percentage of sales of 25%