Top Quality Food Ltd. (TQF) is a medium-sized private food-processing company founded more

than twenty years ago by Ray Smith. TQF is located in Newmarket and mainly provides frozen

chicken, pork, and beef products to grocery stores and restaurants in the greater Toronto area and

its surroundings. Ray is the CEO and sole common shareholder of the company. In recent decades,

consumers pursue healthy lifestyle and tend to eat less meat but more fruits and vegetables. In

noticing this market trend, Ray decided to add a new product line to produce frozen fruits.

Ray approached Meridian Credit Union in early 2020 for a long-term loan to finance its planned

new product line. After carefully reviewing TQF's business plan, Meridian agreed to finance the

purchase of new equipments for the new product line in processing and packaging frozen fruits,

and the new equipment will be used as the loan collateral. Meridian also imposes a debt to equity

ratio of not more than 1 to 1 for the loan, and requires audited financial statements from TQF every

year. Ray agreed to satisfy all of Meridian's requests, and in the fall of 2020, he hired Sherman

LLP as the auditor for TQF. As a staff accountant of Sherman, your supervisor asked you to take

care of the TQF account.

December 31, 2020 will be the first year end which TQF will be audited. TQF's earnings in recent

years have averaged $ 300,000. In a recent meeting with Ray, he asked you to comment on the

relevant accounting policies regarding the transactions which you have noted below:

1.Over the years, TQF acquired many food processing equipments. A p asteurizer machine

purchased at $ 44,000 five years ago now has a net book value of $ 33,000. A similar but more

efficient machine will become available in February 2021. Ray plans to sell the aging

equipment for $ 22,000, and replace it with the new product when it comes on the market.

2.The following three transactions are related to TQF's employees during 2020:

a) TQF offers parental benefits to its staff as a top-up on EI benefits so that employees end

up receiving 100% of their salary for a minimum of 12 months of parental leave. Joanne

Adams, the Director of Marketing for TQF, who earns $ 90,000 per annum, announced that

she will be taking parental leave for a period of 25 weeks starting on December 1, 2020..

The Employment Insurance program pays her a maximum of $ 800 per week for 17 weeks.

b) At the end of 2020, TQF issued preferred shares in the amount of $ 15,000 to one key

employee, Gary Roberts. The shares have a rate of return of 4% per annum and are

cumulative, redeemable and retractable in two years' time at face value plus dividends in

arrears, if any

3.Ray used the money from issuing preferred share (as stated in 2b above) to help finance a $

120,000 acquisition of common shares in Spring Farm (SF) that produces blueberry,

strawberry, peach and cherry. TQF will now own 25% of SF. SF will be a primary supplier of

those fruits mentioned above for TQF's new product line. Ray explained: "this vertical

integration is critical for the growth of our business! Otherwise I will have to pay about $

10,000 more if I buy from other suppliers. This deal is a big help with cash flow, and it also

helps us to secure the supply which can be volatile depending on the weather."