It is now late February 2021. You are a newly qualified CPA, employed in a medium-sized practice in Cochrane, working on the preparation and analysis of the financial statements of a client, Bearspaw Organic Beef Ltd. (BOBL) for the year ended December 31, 2020. The bookkeeper, Michael Kelly, has recently taken sick. He has mailed you the 2020 year-end unadjusted trial balance plus last years financial statements, and provided you with the other information and explanations, detailed below, from his sick-bed.

The client engagement also requires you to advise the owners on the performance and financial position of the company over the past two years (2020 and 2019).

BOBL is a beef processing company that produces a wide variety of organic beef products using certified organic Alberta beef. It sells the products to supermarkets and also distributes them to bars and restaurants in Alberta. BOBL was started by brothers Keith, Brian, and John Tkachuk in Alberta in 2015 and they own 100% of the common shares, shared equally. Since its founding, sales have increased steadily each year and the company appears quite profitable.

On October 1, 2019, the company expanded its operations by acquiring a state-of-the-art production facility and distribution warehouse in Sundre for $5 million. Prior to that, they rented a small factory and warehouse in Cochrane. The expansion was financed in part by issuing a bond on October 1, 2019 to private investors with a par value of $3,000,000 and 10 year maturity at 6% coupon rate. The market expected return was 8% for this business. Interest payments are made on January 1, April 1, July 1 and October 1 each year. The remaining acquisition price was financed by internal cash reserves and by issuing 100,000 4% preferred shares to private investors on October 1, 2019 for $2,000,000.

BOBL also required operating capital of $800,000 and borrowed from BCR Bank on March 1, 2020. The installment loan has a 2 year term and carries interest at 9%. The terms of the loan provide for semi- annual fixed principal payments plus interest, commencing on September 1, 2020. The bank may demand payment of the loan in full if the current ratio falls below 2.4 to 1.

In late June 2020, the owners hired a new sales team to spearhead a sales drive into Saskatchewan. As of December 31, 2020 this team has been successful in adding $1,000,000 to BOBLs 2020 sales revenue. The original sales target was $500,000 for the six months to December 31, 2020 so management is very pleased with their performance. Sales staff receive remuneration as follows: a monthly base salary, plus every three months a bonus of 15% of their sales for the quarter. The bonus is paid at the end of each quarter. The team was paid an $80,000 bonus in October 2020 relating to their third quarter sales. The final quarter bonus has not yet been paid.

Alberta sales and gross profit for 2020 were more or less identical to 2019. The gross profit margin for Saskatchewan was 35% in 2020.

During the year one of the shareholders in BOBL, Brian, got into debt on a failed property transaction and needed to sell his shares. The other siblings did not want him to sell to an outsider so they agreed that the company would buy them back. On 15 September 2020 he was paid $130,000 for all of his shares. This was recorded as

DR Brians Shares Account $130,000

CR Cash $130,000

On November 10 2020, the remaining shareholders decided that their father, Jim, would be issued 2,000 common shares in the business for cash of $13 per share. This was recorded as follows:

DR Cash $26,000

CR Jims Shares Account $26,000

On September 4, 2020, when some inventory was being transported to Saskatoon an accident caused the driver to lose a finger when unloading the truck. Health & Safety inspectors found that a faulty door mechanism led to the accident. BOBL was fined $40,000 for Health & Safety deficiencies, which was paid in October 2020. The truck driver sued BOBL for $150,000. BOBL took legal advice on the issue but ended up settling the lawsuit in February 2021 for $105,000. They were not insured for this type of incident. The bookkeeper told you that there is also an unpaid invoice for legal fees totaling $16,000 relating to the accident.

On December 1, 2020, after some heated discussion about cash management, the Board of Directors declared the following dividends to shareholders of record on December 15, 2020: common share dividend of $2.50 per share, to be paid March 15, 2020; full year preferred share dividend to be paid March 22, 2021. Keith thought that they should not declare any dividends and keep the cash in the business for additional expansion. However, John hopes to buy a new sports car and needs the cash.

Dr Cr 13,543 825,500 8,200 688,800 5,000,000 62,500 990,000 154,200 575,000 Bearspaw Organic Beef Ltd. DRAFT Unadjusted Trial Balance At December 31, 2020 Cash Accounts receivable Prepaid insurance Inventory Buildings Accumulated depreciation Warehouse equipment Accumulated depreciation Office and storage equipment Accumulated depreciation Accounts payable Bonds payable Bank loan Common shares Preferred Shares Jims's shares account Brian's Shares Account Retained earnings Sales Cost of goods sold Insurance expense Sales and warehouse salaries Sales bonus expense Office and administrative expenses Distribution & warehouse expenses Health & Safety fine Gain on sale of office equipment Interest expense 30,000 264,600 2,596,461 600,000 300,000 2,000,000 26,000 130,000 1,441,022 6,773,924 3,866,350 25,000 719,000 80,000 290,000 855,400 40,000 2,000 171,000 14,264,250 14,264,250 Dr Cr 13,543 825,500 8,200 688,800 5,000,000 62,500 990,000 154,200 575,000 Bearspaw Organic Beef Ltd. DRAFT Unadjusted Trial Balance At December 31, 2020 Cash Accounts receivable Prepaid insurance Inventory Buildings Accumulated depreciation Warehouse equipment Accumulated depreciation Office and storage equipment Accumulated depreciation Accounts payable Bonds payable Bank loan Common shares Preferred Shares Jims's shares account Brian's Shares Account Retained earnings Sales Cost of goods sold Insurance expense Sales and warehouse salaries Sales bonus expense Office and administrative expenses Distribution & warehouse expenses Health & Safety fine Gain on sale of office equipment Interest expense 30,000 264,600 2,596,461 600,000 300,000 2,000,000 26,000 130,000 1,441,022 6,773,924 3,866,350 25,000 719,000 80,000 290,000 855,400 40,000 2,000 171,000 14,264,250 14,264,250