Winery Inc. (WI) is a private corporation formed in 20X5. Prior to 20X5, WI had been operating as a partnership owned by the Verity family. Due to their success and desire to expand they have made the decision to incorporate so that they will have additional sources of financing. They are just establishing their accounting policies for their first year-end as a corporation. Their previous financial statements as a partnership were used for filing their tax returns and management purposes. They were not audited or reviewed.

WI grows grapes and produces wines in Ontario. It also produces beer, spirits, and juices. WI has a small store on the property where it operates winery tours and sells wine. WI incorporated to raise additional capital to expand its operations by building a new building for the winery operations that has 50% additional capacity and a larger store.

In 20X5, to finance the expansion of the winery, WI obtained a bank loan with Big Bank. Previously, when WI operated as a partnership, the bank had provided the company with a line of credit and the owners had provided personal guarantees. The loan now has the personal guarantees removed and instead the bank requires annual audited financial statements and has a financial covenant that stipulates a maximum debt to equity ratio.

You have recently been hired to develop new accounting policies for WI’s 31 December year-end. Previously, the partnership used the cash basis of accounting. The owners know this will no longer be suitable for their corporation. You have been asked by the owners to discuss alternatives and provide recommendations on the appropriate accounting policies for events below that have occurred during 20X5. WI has a tax rate of 34% and an incremental borrowing rate of 10%.

1. The Verity family was issued Class A shares that have 10 votes per share. Other private investors were issued Class B shares with one vote per share. Investors were allowed to purchase the Class B shares in installments over the next four years. All shares must be fully paid in 20X9.
2. WI issued preferred shares in 20X5 to private investors. Instead of cash dividends, shareholders will receive bottles of wine as dividends.
3. In the past, income taxes were paid by the partners (partners taxed personally) not by the corporation. WI anticipates a taxable loss of $500,000 this year due to the expansion.
4. WI initiated a stock option plan in 20X5. Stock options will be granted if employees reach a targeted level of sales for the year.
5. WI incurred $80,000 of costs in 20X5 to develop a website for the company. This included acquired software, costs to register the Internet domain name, research ideas on the style of the website, graphic design, consulting fees, training, and monthly updates on prices.
6. A customer can purchase WI’s wine in the store at the winery and, starting in 20X5, through the new website. A customer can become a member of WI’s new wine club. To join the club, a $200 annual fee is paid. In return, the member is shipped one bottle of wine a month. As part of the annual fee, members receive a free subscription to the Wine Digest, which could be purchased on its own. If the member likes the wine, he or she can then order a case through the website at a 10% discount.
7. The new winery was completed by the beginning of the summer of 20X5. The old winery has been declared a heritage site that cannot be torn down. This has been converted into two stores, which were rented out to two separate tenants with a two-year lease. One store sells local crafts and the other is a farmers market. Lease payments are a small fee of $100 a month plus 10% of revenues. Once WI has enough cash, the company wants to convert this building into a restaurant.
8. Due to the expanded capacity of its new winery, WI did not have enough grapes for production needs. WI entered into an agreement to purchase some grapes from Chile for production. To protect the company from foreign exchange fluctuations, WI entered into a hedge.
9. For tax planning purposes when converting to a corporation, WI issued term preferred shares to the owners. These shares have a cumulative dividend of 10% and a mandatory repayment date in 10 years. Any unpaid dividends must be repaid at that date.

Required:

Prepare the report requested.

Answer rating: 100% (QA)

The Verity family has 10 votes per share Other private investors have one vote per share Preferred s... View the full answer