Mariposa Family Adventure Farms Ltd. (“Mariposa”) has been owned and operated by the Mariposa family for 35 years and specializes in offering family activities at their 100 acre farm, located just outside of Innisfil, Ontario. In the summer months, guests visit the farm animals and purchase fresh produce and baked goods from Mariposa’s onsite bakery. In the fall, guests visit Mariposa’s pumpkin patch and pick their own pumpkins. Other summer and fall activities include touring Mariposa’s corn maze, haunted barn and going on hay rides. Throughout the year, Mariposa’s onsite bakery also makes pies, cakes and other snacks that are sold to Earth Fare’s Grocery Stores (Earth Fare’s), a grocery store chain located in the Greater Toronto area. Today is April 25, 2021 and it is a few days before Mariposa’s year-end, April 30, 2021. You, CPA, have recently been hired as the Controller reporting directly to Mariposa’s Vice President of Finance, Cary Mariposa. This morning Cary called you into a meeting to discuss some projects that Mariposa is considering. Cary begins, “In recent years, Mariposa has seen increased interest in “city dwellers” getting a taste of farming. I have made some notes on the background of the company (Exhibit I). The family activities portion of our operations is growing and though Mariposa does not charge an entry fee, we have seen an increase in spending habits of those guests who visit the farm. To capitalize on this trend, we are considering opening a coffee shop onsite (Exhibit II). However, I am wondering if we will have enough guests to visit the coffee shop in order to make it profitable.

In addition, Mariposa has seen considerable increases in the cost of electricity, which is a significant variable cost to the farm. I have obtained some information on purchasing a wind turbine to generate a supply of electricity to the farming operations (Exhibit III). We would only be interested in pursuing this option if the wind turbine is less expensive than our current electricity costs. Once a year, the company harvest corn crops and loads the bulk raw corn onto a flatbed truck for shipment to large grocery chains and food terminals. Mariposa’s management is currently evaluating the possibility of further processing the raw corn by cleaning it (dehusking), packaging and selling it to an expanded set of customers (high end food purveyors such a Whole Foods, etc.) at higher prices. The option of buying a new cleaning and packaging machine and reconfiguring part of the existing building is ruled out as being financially infeasible. Instead, Cary has explored outside contracting arrangements for the cleaning and packaging process. Cary has put together the following summary in exhibit VI. Cary would like you to prepare an analysis to show whether it is more profitable for Mariposa to continue selling raw bulk corn or to process it further through packaging and cleaning. She needs to see two separate analysis showing with or without the impact on corn scraps. Further, she is curious how would your analysis be affected if the cost of producing raw corn could be held down to $20 per bushel? I would like you to provide me with a report that analyzes each of these potential projects. Although our primary focus is on increasing income, I am also interested in any other opportunities or challenges that we may face with each project.

I also have some concerns about the revenue payments that we receive from Earth Fare’s (Exhibit IV). As you know, our financial statements will be audited for the first time this year. Although I have already addressed the issues associated with a first time audit, I would like you to identify and make recommendations on any financial accounting issues that you identify before the auditors arrive. Although it will not impact this year’s audit, please consider any financial accounting issues related to the new projects.” You spend the rest of the morning reviewing Mariposa’s interim financial statements and discussing operations with Mariposa management, and have summarized your findings (Exhibit V)

EXHIBIT I BACKGROUND COMPANY INFORMATION •

Mariposa is one hundred percent owned by Fred and Paula Mariposa. It is considered by the Mariposas to be a family operation, as both their children and grandchildren are heavily involved as employees and management of Mariposa. Fred and Paula rely on cash flows from the farm to cover their living expenses. • Mariposa operates with 20 full-time employees. Twelve of the full-time employees work in the bakery division, while the remainder manage Mariposa’s operations or assist in the adventure farm activities. • Peak season at Mariposa starts at the beginning of May and continues until the end of October, which lasts 24 weeks. During peak season, several seasonal employees assist the full-time employees with running the adventure farm. • Mariposa welcomes as many as 500 guests on a given weekend during peak season. However, some seasons are plagued by poor weather, which significantly decreases overall attendance throughout the season.

EXHIBIT II PROPOSED COFFEE SHOP – MEETING NOTES •

The proposed coffee shop would sell various beverages (hot chocolate, tea, coffee and iced coffee) and pastries produced in Mariposa’s bakery division. The coffee shop would be open during Mariposa’s peak season only. • The cost of selling each beverage at the coffee shop would include the following: o Disposable cup with Mariposa Logo $0.25 o Cup protector $0.05 o Tea, coffee or hot chocolate mix $1.00 o Iced coffee mix $1.05 • The average cost to produce each pastry is $0.30 per unit. • The coffee shop would charge $3 for a beverage and $1.50 for a pastry. For every 5 beverages sold, Mariposa expects to sell 3 pastries. • The coffee shop would incur labour costs of one additional full time employee. The employee would work 40 hours a week at a rate of $13 per hour. • Additional costs incurred by the coffee shop would include utilities of $200 a month and maintenance of $100 a month. In the first year of operations, the coffee shop would also incur costs for new furniture and fixtures of $7,000 and advertising costs of $1,000

EXHIBIT III PROPOSED WIND TURBINE PURCHASE – MEETING NOTES •

With the price of electricity constantly on the rise, wind turbines are an environmentally sustainable energy source that can last approximately 20-25 years. The property owned by Mariposa has good wind resources, making a wind turbine a practical source of electricity. • The cost to purchase a small wind turbine ranges from $2,000-$8,000 per kilowatt (kW). For a farm the size of Mariposa, operating at their current levels, they would need a 50-kW wind turbine. Mariposa is thinking of purchasing the turbine from Windy Energy Ltd. (Windy), who said they could get Mariposa a deal and sell Mariposa the 50-kW wind turbine for $4,750 per kW. This cost includes the inverters, batteries, blades, the generator, on-grid controller, transformers and the hydraulic tower. • Installation of the wind turbine will cost an additional $10,000. • To maximize the efficiency and use of the wind turbine, it is necessary to perform regular maintenance. For the 50-kW turbine, the maintenance costs are estimated to be 23% of the cost of the system, before installation and these costs will be incurred once every 5 years. These maintenance costs will not extend the useful life of the wind turbine, nor will the costs increase the specified power production. • The 50-kW wind turbine will produce 438,000 kilowatt hours of power annually. Currently, Mariposa pays 6.8 cents per kilowatt hour for the first 600 kilowatt hours each month and 7.9 cents per kilowatt hour for anything above that amount. Based on last year’s electricity bills, Mariposa used 410,400 kilowatt hours. • Windy estimates the useful life of the wind turbine to be 25 years. As per government regulations, Mariposa would be required to decommission the wind turbine at the end of its life and remove all traces of it from the property. The cost to decommission the wind turbine is $62,300.

EXHIBIT IV CARY’S NOTES ON EARTH FARE’S GROCERY STORES

• In October 2018, Mariposa began distributing its baked goods to Earth Fare’s, a grocery chain with 10 stores located throughout the Greater Toronto Area. The baked goods are shipped from the Mariposa bakery division directly to the individual Earth Fare’s locations. Each location has an information system to track the sales of the units. In the agreement between Mariposa and Earth Fare’s, Earth Fare’s guaranteed that the stores would sell at least 200 units of baked goods (retailing at approximately $2,000 worth of product) each month. At the end of the month, each Earth Fare’s store manager sends Mariposa a cheque for 25% of the revenue of all goods sold. However, not all goods that Mariposa’s ships to Earth Fare’s are sold. Some products become stale dated and as a result are disposed of by the Earth Fare’s store. • Before retiring in October 2020, our previous Controller mentioned that Mariposa’s revenues from baked goods sold at Earth Fare’s have decreased. During the first few months of the contract, Mariposa was receiving monthly payments of $3,500 from Earth Fare’s. Recently, payments have decreased to $2,500 a month. I found this decrease odd, since all recent market research indicates that demand for our products has increased.

EXHIBIT V NOTES FROM REVIEW OF MARIPOSA’S INTERIM FINANCIAL STATEMENTS AND DISCUSSIONS WITH MARIPOSA MANAGEMENT

• The financial statements have been prepared using Accounting for Private Enterprises (ASPE). • Mariposa currently records the revenue earned from selling baked goods to Earth Fare’s when the goods are shipped to the store. • Since the retirement of the previous Controller, all accounting records, including the 2021 financial statements, have been maintained by Thomas Mariposa, one of the grandchildren in the Mariposa family. Although Thomas is not a designated accountant, he completed several accounting courses while studying business at the University of Toronto Scarborough. • Cary mentioned that there is a debt-to-equity bank covenant that is attached to Mariposa’s bank loan, which bears interest at the current market rate. The bank loan was used to purchase a new combine harvester for the farming operations. Mariposa is currently in compliance with this covenant; however, they will need to consider the impact of the various financial accounting issues relating to the purchase of the wind turbine. • If Mariposa decides to purchase the wind turbine, Cary’s Great Aunt Gertrude has agreed to provide the financing for the purchase. She has agreed to a $400,000, 5-year term loan bearing interest at 4%. Great Aunt Gertrude insists that the debt be convertible. She would like the option to convert the debt principal into 100 common shares at any time prior to maturity. In exchange for the convertible feature, the loan would bear an interest rate of 4%, as compared to the current market rate of 6%. The principal amount of the loan would be due at the end of the 5th year from the date on which the loan agreement would be signed and interest would be payable annually.

Exhibit VI PROPOSED PROCESSING RAW CORN

Below is the summary of information of what Cary was able to research regarding cleaning and packaging the raw corn. Selling price of raw corn $29 per bushel Cost of producing raw corn $22 per bushel Selling price of packaged and cleaned corn $36 per bushel Annual raw corn output 10,000,000 bushels Percentage of material loss in packaging/cleaning corn 6% Incremental Costs of Packaging and Cleaning Processes Direct labour $800,000 per year Supervisory personnel 200,000 per year Heavy equipment: rental, operating, maintenance costs 25,000 per month Contract packaging and cleaning 3.50 per bushel of raw corn Outbound rail freight 240 per 60-bushel rail car Cary also learns that 75% of the material loss that occurs in the cleaning and packaging process can be salvaged as an important ingredient in producing corn oil, which can be sold to manufacturers. The sale of corn scraps is erratic and the selling price of corn scraps ranges from $15 to $24 per bushel and costs of preparing corn scraps for sale range from $2 to $4 per bushel.