MGA C10H3F (FALL 2024) L01

L. HARVEY
MIDTERM EXAM – TUESDAY NOVEMBER 5, 2024 (9:10am to 11:10am)

Last Name: _____________________________ SIGN WHEN INSTRUCTED ONLY

First Name: _____________________________

Student Number: _____________________________ _____________________________

Instructions
1. There are 2 parts to this exam on 9 pages
2. The midterm exam is being written in IC 212
3. The midterm exam is out of 50 marks and is 2 hours (120 minutes) in length (make
sure to follow the time limits as stated):

Part Time Allocation Total Marks

Part I: MCQs 30 minutes 15 marks
Part II: Case 90 minutes 35 marks
Total: 120 minutes 50 marks

4. This midterm exam is being written on your own device using the ExamSoft/Examplify
software (the exam must be downloaded to your device prior to the start of the exam
otherwise the time it takes to download the file to your computer will be deducted from
your total allocated time)
5. Ensure your name and student number are included on the first page of the midterm
exam question paper above
6. The question paper (in full) and your cheat sheet must be handed in at the end of the
exam otherwise a mark of zero will be awarded
7. The only aids allowed are a hand-held, battery-operated non-programmable
calculator and a double sided letter-size (8.5 inches by 11 inches) cheat sheet that
follows the detailed cheat sheet instructions that must be handed in
8. A confirmation that your midterm exam responses have been uploaded must be
displayed to the instructor, TA, and/or invigilator before leaving the exam room
9. State any assumptions necessary
10. Good luck!
The University of Toronto's Code of Behaviour on Academic Matters applies to all University of
Toronto Scarborough students. The Code prohibits all forms of academic dishonesty including,
but not limited to, cheating, plagiarism, and the use of unauthorized aids. Students violating the
Code may be subject to penalties up to and including suspension or expulsion from the University.
In submitting this exam in ExamSoft/Examplify under my name, I confirm that my conduct during
this exam adheres to the Code of Behaviour on Academic Matters. I confirm that I did NOT act
in such a way that would constitute cheating, misrepresentation, or unfairness, including but not
limited to, using unauthorized aids and assistance, collaborating with another person,
impersonating another person, and committing plagiarism.

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MGA C10H3F (FALL 2024) L01
L. HARVEY
MIDTERM EXAM – TUESDAY NOVEMBER 5, 2024 (9:10am to 11:10am)

Part I – Multiple Choice Questions

Total Marks: 15 (1 mark per question)
Total Time Allocation: 30 minutes

[Please refer to ExamSoft/Examplify for the Multiple Choice Questions]

[Please answer all Multiple Choice Questions in ExamSoft/Examplify. You may also write your
responses below as well but they will only be used if there is an issue with the
ExamSoft/Examplify submission]

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MGA C10H3F (FALL 2024) L01
L. HARVEY
MIDTERM EXAM – TUESDAY NOVEMBER 5, 2024 (9:10am to 11:10am)

Part II – Case
Total Marks: 35
Total Time Allocation: 90 minutes

[Please answer the Case Question in ExamSoft/Examplify]

General Overview

Cherry Blossoms Corp. (CBC) is a privately-held company operating since 1999 and located in Prince
Edward Island. CBC harvests, processes, distributes and markets lobsters and red sand clams (clams) to
Canada and the United States. It sells primarily to large grocery retailers and restaurant chains that
specialize in seafood. CBC’s objective is to be a leading supplier of clams and lobsters with a well-known
and respected brand name. Additional information about CBC is included in Exhibit 1.

On October 15, 2024, the CFO of 20 years passed away. CBC is in the process of hiring a new CFO. For
the last four months of the 2024 fiscal year, the CFO had not been well, and was not able to perform his
duties. His work was delegated to the accounting staff, including the preparation of the 2024 draft financial
statements. CBC reports under IFRS. The draft financial statements are provided in Exhibit 2.

The Board of Directors consists of the CEO (also chairman of the board) and seven representatives from
the Class B shareholders. The board meets quarterly to review strategy and financial reports. The board
has one committee, an Audit Committee, which meets quarterly to review the statements. The committee
met yesterday to review the draft 2024 financial statements before submitting them to the auditors. Extracts
from the meeting minutes are in Exhibit 3.

Today is November 5th, 2024. You, CPA, work as an employee of CPA LLP. Recently, you met with Caren
Au, who is a partner with the firm. CPA LLP will again perform CBC’s year-end audit. Although the 2024
year-end audit plan was completed in early June, some additional issues have arisen that may require
changes to the plan. As a result, Caren has asked you to draft a memo outlining any updates required to
the audit plan. The audit plan should include an assessment of the overall financial statement risk, a
discussion of materiality and the audit approach, and a description of the high risk financial statement items.
A description of possible procedures to be performed should also be included for the high risk financial
statement items.

In addition, CBC implemented a new ordering and invoicing system in 2024. There have been many
customer complaints regarding incorrect invoice amounts. Dealing with these complaints has added to the
accounting staff’s workload. CBC would like help in evaluating the system and therefore Caren has asked
you to identify any control weaknesses and to suggest improvements in your memo as well.

Required:
Prepare the memo as requested by the partner.

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MGA C10H3F (FALL 2024) L01
L. HARVEY
MIDTERM EXAM – TUESDAY NOVEMBER 5, 2024 (9:10am to 11:10am)

Exhibit 1
Background Information

Ownership
CBC is owned 60% by the CEO (15,000 Class A Common Shares) and 40% by a group of 50 CBC
employees (10,000 Class B Common Shares). Having continuously reinvested its profits, CBC has not paid
any dividends in over a decade.

When first approached about becoming Class B shareholders, the employee group was promised a return
on investment of at least 10% annually in the form of dividends. The Class B shareholders have recently
voiced concerns about the return on their shares. In lieu of the original contract terms, the Class B
shareholders are proposing an exchange of their Class B common shares for retractable preferred shares.

Government Regulations and Industry Information

The Canadian Federal Department of Fisheries and Oceans (DFO) regulates the amount of harvest by
issuing licences for specific species. A licence has an indefinite life. A nominal fee is paid each year to
maintain each licence. The DFO sets the annual “total allowable catch” by species and by region for: 1)
inshore fishing; and 2) offshore fishing. These quotas, designated to a particular enterprise, may be
transferred, traded or sold.

Supplier Bonus Arrangement

In addition to being paid for their catch, inshore lobster suppliers who have been supplying CBC for five
years or more qualify for a bonus. Currently, 20 suppliers qualify for the bonus, which is calculated based
on a percentage of CBC’s lobster profits. The current year bonus is substantially less than the bonus in the
previous two years.

Investment in Freeze the Shell Co.

On August 24, 2024, CBC purchased 25,000 common shares of Freeze for cash consideration of
$1,754,000. The schedule below indicates the fair values of net assets on the acquisition date as prepared
by an independent appraiser.
Identifiable Net Asset Carrying Value Fair Market Value
Net working capital $ 1,690,000 $ 1,690,000
Land 1,000,000 2,711,000
Plant and equipment 13,029,000 13,029,000
Customer relationships - 2,500,000
Long-term debt (11,147,250) (11,147,250)
$ 4,571,750 $ 8,782,750
Freeze has a September 30 year end and follows IFRS. For the period from August 16 to September 30,
Freeze reported a net profit after tax of $750,00 and paid $55,000 of cash dividends to CBC. The customer
relationships will be useful over the next fifteen years.

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MGA C10H3F (FALL 2024) L01
L. HARVEY
MIDTERM EXAM – TUESDAY NOVEMBER 5, 2024 (9:10am to 11:10am)

Exhibit 2
Draft Financial Statements

Cherry Blossoms Corp.

Statement of Financial Position as at September 30
(in thousands of Canadian dollars)

2024 2023
Draft Audited
Assets
Current assets:
Cash $ 720 $ 1,678
Accounts receivable 3,742 3,581
Advances to suppliers (Note 1) 290 325
Inventory (Note 2) 4,923 4,881
Prepaid expenses 333 541
10,008 11,006

Investment in Freeze (Note 3) 1,754 -

Property, plant and equipment (Note 4) 10,844 11,785
Licences 8,900 8,900
Total assets $ 31,506 $ 31,691

Liabilities
Current liabilities:
Bank indebtedness (Note 5) $ 2,128 $ 1,288
Trade payables and accrued liabilities 3,054 3,258
Provisions (Note 6) 430 230
Current portion of long-term debt 1,570 1,690
7,182 6,466

Long-term debt (Note 7) 18,531 20,101

Provisions (Note 6) 970 850
Deferred tax liabilities 156 250
26,839 27,667
Shareholders' equity
Common shares 1,650 1,650
Retained earnings 3,017 2,374
Total shareholders' equity 4,667 4,024

Total liabilities and shareholders’ equity $ 31,506 $ 31,691

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MGA C10H3F (FALL 2024) L01
L. HARVEY
MIDTERM EXAM – TUESDAY NOVEMBER 5, 2024 (9:10am to 11:10am)

Exhibit 2 (Continued)
Draft Financial Statements

Cherry Blossoms Corp.

Statement of Comprehensive Income for the Year Ended September 30
(in thousands of Canadian dollars)

2024 2023
Draft Audited
Sales $ 39,025 $ 35,671
Expenses
Harvesting and procurement (Note 8) 23,415 20,750
Processing (Note 8) 3,620 3,455
Freight and other transport 2,406 2,275
Depreciation 2,374 2,360
Cost of goods sold 31,815 28,840
Administrative and selling (Note 9) 4,390 3,510
Total expenses 36,205 32,350
Operating income 2,820 3,321

Other income/gain and expenses/loss

Finance costs (interest) (1,978) (2,005)
Dividend income from Freeze 55 -
Foreign exchange gain (loss) (40) (57)
Income before taxes 857 1,259

Income taxes (214) (315)

Net earnings and comprehensive earnings $ 643 $ 944

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MGA C10H3F (FALL 2024) L01
L. HARVEY
MIDTERM EXAM – TUESDAY NOVEMBER 5, 2024 (9:10am to 11:10am)

Exhibit 2 (Continued)
Draft Financial Statements

Note 1 – Advances to suppliers

These are non-interest bearing, due on demand and secured by the suppliers’ catch.

Note 2 – Inventory

2024 2023
Lobsters and clams $ 4,023 $ 3,931
Supplies and other 900 950
$ 4,923 $ 4,881

Note 3 – Investment in Freeze the Shell Co. (Freeze)

CBC owns 18% of the outstanding shares of Freeze. This investment has been recorded at
cost.

Note 4 – Property, plant and equipment

Manufacturing
Land Building Vessels Total
equipment
Net book value
Opening balance
$ 170 $ 1,567 $ 830 $ 9,218 $ 11,785
Additions 0 75 300 1,058 1,433
Depreciation 0 (150) (436) (1,788) (2,374)
Net book value 170 $ 1,492 $ 694 $ 8,488 $ 10,844

Year-end balances
Cost 170 5,980 6,240 53,940 66,330
Accumulated depreciation - 4,488 5,546 45,452 55,486
Ending balance $ 170 $ 1,492 $ 694 $ 8,488 $ 10,844

Depreciation is recorded on a straight-line basis, as follows:

Building 40 years
Equipment 15 years
Vessels 30 years

Note 5 – Bank indebtedness

CBC has a line of credit, to a maximum of $3,000, bearing interest at prime + 2% (currently, prime
is 3%). It is secured by accounts receivable and inventory.

Note 6 – Provisions
The provisions for asset decommissioning costs relate to retirement of vessels and plant facilities.
The increase of $320 over the prior year represents unwinding of the discount, which is
recognised over time in profit or loss as a finance cost.

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MGA C10H3F (FALL 2024) L01
L. HARVEY
MIDTERM EXAM – TUESDAY NOVEMBER 5, 2024 (9:10am to 11:10am)

Exhibit 2 (Continued)
Draft Financial Statements

Note 7 – Long-term debt

2024 2023
Marine loan $ 5,832 $ 6,792
Other loans and liabilities 14,269 14,999
Total 20,101 21,791
Less current portion (1,570) (1,690)
Long-term portion $ 18,531 $ 20,101

The marine loan, which is payable in euros, was advanced 10 years ago for the acquisition of the
vessel named Clam from a German supplier. The 8% loan is repayable in quarterly instalments
of $210 (150 euros), and matures in 2030. The lender requires audited annual financial
statements prepared in accordance with IFRS. Realized foreign exchange gains and losses are
recorded through profit or loss, and unrealized foreign exchange gains and losses are
insignificant.

Note 8 – Harvesting and procurement and processing

Harvesting and procurement includes labour, fuel and repair costs related to operating the
vessels. Processing includes the costs of processing lobsters and clams into fresh or frozen
packages. Both of these production costs include all direct and indirect materials and labour.

Note 9 – Administrative and selling costs

Administrative costs include salaries and benefits, professional fees, occupancy costs and other
selling costs including advertising, marketing, and bad debts.

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MGA C10H3F (FALL 2024) L01
L. HARVEY
MIDTERM EXAM – TUESDAY NOVEMBER 5, 2024 (9:10am to 11:10am)

Exhibit 3
Extracts of the Minutes from the October 2024 Audit Committee Meeting

Financial Reporting Issues

As a result of the illness and death of the CFO, we have some concerns about the 2024 draft
statements and the work performed by the accounting staff for the past four months.

New Investment
We paid $1,754,000 for this investment. The valuation estimates completed by a valuation firm
include a carrying value of the net assets of $4,571,750 and a fair value of the net assets of
$8,782,750. We purchased 25,000 shares, which gave us 18%. The remaining shares are widely
held. We are also able to negotiate having two of the five director seats on their board and have
the ability to participate in policy decisions.

Lobster I
This vessel had deteriorated over the last year and as a result, the Audit Committee had requested
some additional information at the last meeting:
• The original cost was $10,000,000 and the accumulated depreciation to September 30,
2024 is $8,333,350.
• The estimated value in use is $974,850 and fair value less costs of disposal is $1,613,500.

New Crane
Vessels, such as the Lobster II, each have three major components: the crane, the engine and
the vessel structure. In late December, we purchased and installed a new high-tech crane on the
Lobster II. The Lobster II was out of commission for about one week while the new crane was
installed. The new crane allows for more efficient lobster fishing, reducing costs and enhancing
productivity. Costs were capitalized as follows:

Cost of New Crane $ 845,000

Supplier Financing Costs 14,000
Removal of Old Crane from Lobster II 34,000
Installation of New Crane on Lobster II 56,000
Training of Employees on Crane Operation 109,000
$ 1,058,000
Payroll Controls
The CFO reviews the accounting clerk’s work for the bi-weekly payroll and also completes a
monthly payroll reconciliation which took into account any changes in new hires and terminations.
With the CFO gone, the Audit Committee is concerned that these controls are no longer being
performed.

Waste Water Project

In March, CBC entered into an agreement with an independent contractor for some experimental
development to improve the blanching process and reduce waste water. To date, the contractor
has invoiced for labour, materials, and laboratory costs of $300,000. We recorded these costs as
additions to equipment since we will eventually have a new and more cost-efficient process. The
contractor has produced a working prototype which has performed well during initial testing.
Further testing will be performed this summer to help refine the process.

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