Carroway Cool Top

B.                                                                                    Memo

To: Jack Lawson, CFO

From: Rose Reddick, CGA

Date: October 5th, 2014

Re: Current year accounting issues

I would like to discuss the tax implications and some accounting issues this year

Research cost should be expensed

The deferred development costs for Carroway Cool Top should not be capitalized. This is because Carroway Cool Top is currently in the research stage only and the benefits of this product line are still uncertain. As the costs have capitalized, the incomes and assets are overstated. An adjustment has to be recorded and these development costs should be expensed in 20x3.

Going Public

In order to go public, CCL needs audited financial statements for the past three years of the company’s existence, as well as preparation of unaudited interim periods. As CCPC compliances with ASPE, public company compliance with IFRS, I suggest you to adopt IFRS as early as possible if you intent to go public. Under IFRS, CCL can choose the accounting policy of either cost & depreciation or revaluation method of fair market value. CCL is using taxes payable and recoverable method now, and it will be used future income tax method under IFRS. You will be expected more accounting workload as required for quarterly financial reports to disclose material changes, annual audited financial statement with MD&A.

Investors demand higher returns on shares than on debt or preferred shares since the risk is higher. You need to consider the dividend policy before going public. The dividend is not tax deductible while interest pay to the lender is deductible expense.

Tax concern for going public

As CCL goes public, it will lose the small business deduction and no longer eligible for reduced statutory tax rate on a portion of its business income and full refund on expenses related to SR&ED. CCL will also loss the CDA that used to pay tax free dividends to shareholders.

For the control concern being a public company, Chip and Charles can maintain the majority of shares and seats of director, as well as implementing some strategies for inhibit a potential hostile takeover.

Also, you have to consider that the flotation costs are not cheap. The flotation costs can be amortized over 5 years.

Obtain a long term bank loan

Another option is obtain a long term bank loan. The bank will base on the ratios on your financial statements to decide whether or not to approve the loan, such as debt to equity ratio, current ratio etc. The interest of long term debt usually higher than the line of credit since the risk for the bank is higher. However, CCL has an interest risk with line of credit if the interest rate increases. CCL also faces to liquidity risk if the bank doesn’t renew the line of credit. Therefore, although the interest is higher on long term debt, the risk of bankruptcy for the company is lower. All interest expenses used for generating income are tax deductible. CCL may compares the industry’s debt to equity ratio and decide whether choose to raise equity or debt.