Westside Grocery Store (WGS) is an independent, full-service grocery store in Regina, Saskatchewan. WGS is a family-owned store that was founded in 1968 by Jack and Judy Hill. Originally, Jack and Judy each owned 50% of the common shares of WGS. However, WGS underwent a corporate reorganization in 2009 when Jack and Judy retired. The reorganization resulted in Jack and Judy'
 s common shares being converted into preferred shares, with a new class of common shares being issued to their children, Peter and Penny. Jack and Judy are no longer involved in the day-to-day operations of WGS; however, they have kept their positions on the board of directors. More details on the corporate reorganization can be found in Exhibit I.

Peter and Penny have had some disagreements regarding the management of WGS since they started running the operations in 2016. Much competitive pressure has been felt in recent years due to general economic conditions combined with the constant competitive pressures from the big box retailers. WGS has experienced a steady decline in its gross margin as a result. (See Exhibit II for historical financial statements.) Accordingly, Peter has agreed to purchase Penny?s common shares to become the sole owner of WGS.

As a child, Penny never really enjoyed the grocery store business and always wanted to pursue a career in real estate. Upon the sale of her common shares, Penny will make that dream a reality and focus on her real estate career. She will use the proceeds from the common stock sale to help her finance the initial costs of establishing herself as an agent. On the other hand, Peter has always been involved in the grocery store?s operations. Peter completed a commerce degree in university, with a major in marketing and a minor in accounting. He is excited to apply his business knowledge in a management role with the hopes of turning around WGS?s prospects. He has some ideas regarding new marketing techniques, focusing on niche markets, developing connections with local famers, and partnering with a larger store to distribute lower cost products. Peter firmly believes that these initiatives should help turn WGS around.

Penny and Peter have agreed that the company will be valued based on the net book value of equity as the declining earnings trend may be indicative of no goodwill. (That is, earnings do not support a price premium over and above the net asset value.) Peter has informed Penny that the preliminary financial statements for the 2020 year end suggest a value of $99.58 per common share (common stock, contributed surplus, and retained earnings balances).

Hussain and Fong, LLP is WGS?s external accounting firm and you have been involved with WGS?s annual financial statement review. As a senior accountant with Hussain and Fong, you are planning this year?s engagement, and have met with Penny and Peter. You are aware that the current year?s financial statements will be used as part of the common share sale, and spent some extra time with Peter to discuss the accounting issues. Your notes are summarized in Exhibit III.

Since Peter is exclusively involved in the accounting function of WGS, Penny has requested that you prepare a memo that outlines all of the key accounting issues in the current year. She is hoping that you will discuss alternative treatments and provide a recommendation.

Required

Prepare the report requested by Penny.

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Exhibit I Corporate Reorganization Corporate reorganization The corporate reorganization was conducted in order to allow Jack and Judy to transfer control and all future growth of the company to Peter and Penny. Essentially, Jack and Judy's common shares ($100 book value) were converted into newly issued preferred shares. The preferred shares were valued at $650,000, which represents the fair value of WGS at the time of the reorganization. A total of $550,000 of the value was in the form of retained earnings, while the remaining . Common shares: • Voting: • Dividend: Peter Hill 50% of common shares • Redeemable: • Retractable: Share characteristics After the corporate reorganization, the share characteristics are summarized as follows: $100,000 was goodwill, which was not recorded in the financial statements. Two thousand new common shares were issued equally to Peter and Penny Hill at a value of $1 per share. Penny Hill 50% of common shares One vote per share As declared by the board of directors No No Corporate structure After the reorganization, the corporate structure is summarized as follows: WGS Corporation Jack & Judy Hill 100% of preferred shares • Preferred shares: • Voting: • Dividend: Redeemable: • Retractable: Nonvoting 4% dividend yield, cumulative At a value of $650,000 At a value of $650,000 Exhibit I Corporate Reorganization Corporate reorganization The corporate reorganization was conducted in order to allow Jack and Judy to transfer control and all future growth of the company to Peter and Penny. Essentially, Jack and Judy's common shares ($100 book value) were converted into newly issued preferred shares. The preferred shares were valued at $650,000, which represents the fair value of WGS at the time of the reorganization. A total of $550,000 of the value was in the form of retained earnings, while the remaining . Common shares: • Voting: • Dividend: Peter Hill 50% of common shares • Redeemable: • Retractable: Share characteristics After the corporate reorganization, the share characteristics are summarized as follows: $100,000 was goodwill, which was not recorded in the financial statements. Two thousand new common shares were issued equally to Peter and Penny Hill at a value of $1 per share. Penny Hill 50% of common shares One vote per share As declared by the board of directors No No Corporate structure After the reorganization, the corporate structure is summarized as follows: WGS Corporation Jack & Judy Hill 100% of preferred shares • Preferred shares: • Voting: • Dividend: Redeemable: • Retractable: Nonvoting 4% dividend yield, cumulative At a value of $650,000 At a value of $650,000

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Prepare a memo that Outlines Kay accounting issues I... View the full answer