Aquatic Biotechnology Inc ABI is a medium sized public

company operating #4
Aquatic Biotechnology Inc. (ABI) is a medium-sized, public company operating an aquaculture
business in eastern Canada. The company has been in operation since the mid-1990s, and
during the latter half of the 2000s it grew at a rapid pace through both increased sales and the
acquisition of minor competitors.ABI has an October 1 year end. It is now November 15, 2013
and you, CA, are working on the 2013 audit. Your firm, Linkletter & Cormier Chartered
Accountants, has conducted the audit of ABI for several years and has always considered it to
be a routine audit engagement. The audit senior on the engagement recently resigned from the
firm, and you have been asked to act as senior on the audit. All October 31 inventory counts
and routine confirmations have been dealt with, and you have been provided with the audit
planning files. These files are summarized in Exhibit C4-2(a).The corporate structure of ABI is
based on management's philosophy that vertical integration will allow this growth-oriented
business to achieve its objectives. ABI controls nearly all aspects of the supply chain, from
growth of the product to processing and delivery to the customer. ABI operates the hatchery,
where each of the three major products (salmon, trout, scallops) are hatched, the fish farms
where growth takes place, and the processing plant where smoking and packaging occur. ABI
also owns Marine Tech Limited (MTL), a supplier of boats, nets, and gear to the Canadian
market. MTL provides nearly all supplies, repairs, and maintenance for the corporate
group.Scallop farming is a relatively new area of aquaculture, in which ABI has invested a
substantial amount of capital for research and development. Scallops are grown in a "cage"
which sits on the ocean floor in an area that does not experience problems such as strong tides
and bacteria which could destroy the crop. As with many other aquaculture products, scallops
can take from 24 to 30 months to reach a marketable size. ABI has yet to earn any revenue
from scallop farming, but it is confident that its new system will be successful.ABI has been
working on scallop farming technologies for about five years. Previous years' audit files indicate
that the costs related to scallop farming had been expensed, as the company lost much of its
stock during the winter months. ABI is confident that its new cage style, developed in 2012, will
result in a tremendous crop ready for harvest in 2013.At the year end, the scallop stocks were
checked by the company and by an aquaculture expert hired by your firm, and it was
determined that the stock is at 75% of its marketable size. However, the aquaculture expert
would not comment on the likelihood that the stock would reach full maturity. At maturity, it is
estimated that the crop will be 500,000 kilograms. Costs to date related to the 2013 harvest
have been $1.425 million, of which $1.2 million has been incurred in fiscal 2013.Salmon and
trout farming are major divisions of ABI. Both have been successful for a number of years,
although the selling price of salmon decreased slightly in 2013. The salmon division has
provided substantial cash flow to the company, due to the perfected method of growth and the
low market costs associated with the product. Trout farming is a relatively new division of the
company and has been moderately successful for the past two years.Despite the positive cash
flows generated by the salmon division, ABI has had difficulty in managing its cash flows due to
its substantial investment in scallop farming. In August 2013 ABI decided to refinance much of
its debt to consolidate loans. The Business Development Bank, a federal government agency,
agreed to consolidate most of ABI's debt and loaned ABI an additional $5 million for five years,
with the first year to be interest-free. The bank further agreed to extend the interest-free period
for each fiscal year that ABI is able maintain net income at $1 million or more. A loan
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 arrangement fee of $500,000 was paid in order to cover the bank's costs to consolidate the
debt. The bank requires ABI to maintain a current ratio above 1, given the current level of debt.
The new debt structure has allowed ABI to improve its cash situation.You have just reviewed
the working paper files and have met with ABI's controller, Jim Gibbins, to gather a set of draft
financial statements [Exhibit C4-2(a)]. The engagement partner has asked you to prepare a
memo summarizing the relevant accounting issues in preparation for her meeting with
ABI.Required Prepare the memo.EXHIBIT C4-2(a)INFORMATION OBTAINED FROM JIM
GIBBINS1. During the year ABI acquired Bay Mussels Limited (BML), a large mussel grower in
the area, to diversify its product lines, ABI paid $4.7 million to acquire 100% of the outstanding
shares of BML. BML's net tangible assets were valued as follows on the date of acquisition:2.
Jim has not yet recorded revenue for the scallop production, but would like to record as much
revenue as possible in 2013, since the product is 75% of its marketable size and orders for the
coming year are already being received. The price per kilogram can be reasonably estimated at
approximately $20.00, although supply may affect the market price.3. Since early November
ABI has been holding discussions with a major competitor to sell its trout division. ABI believes
that, although the division has been relatively successful, scallop farming is much more
attractive in the long run. The buyer has made a preliminary offer of $2.8 million for the trout
division, and ABI management expects that the cash flow will assist the company in getting
through the winter until scallop sales begin. The buyer's offer expires on November 30, but the
buyer may be open to further negotiations.
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