Kelowna Brick and Cement Company (KBCC) is a medium-sized company that specializes in providing cement for construction sites, primarily in the Kelowna/Kamloops area. KBCC had sales two years ago of $10 million and sales for the year just ended were $12 million. At present KBCC is solely owned by Joel Hatchuk, who founded the private company in 1980. KBCC follows the Accounting Standards for Private Enterprises. Despite its revenues, KBCC operates with few administrative staff, currently employing 12 individuals in addition to Joel, who is there every day.

Joel is considering expanding his operations into the Vancouver area. In order to do so, he will have to look into financing options. He is contemplating two debt options: traditional bank financing or bonds. He is also considering selling some of his common shares to five of his friends and relatives. He is unsure of how these options would impact him and the current organization of his company.

In December of this year, one of KBCC's trucks carrying cement was in an accident. The substance spilled into a local river, contaminating the water supply. KBCC's lawyers have stated that the local residents have filed a lawsuit for $2 million. They expect that KBCC will be found guilty but the settlement will be between $1.0 million and $1.6 million. KBCC had let its insurance policy expire and therefore does not have any coverage.

On December 31, four of KBCC's trucks were loaded with customer freight and were shipped the same day, FOB shipping. The goods were delivered to the customers on January 5 and 6, respectively. The revenue of $80,000 was recorded in the books on December 31.

Joel knows about the importance of internal controls but believes he needs a refresher. He had an individual from finance leave earlier this year and is now using the accounts receivable person to receive the cash and cheques, post them to the accounts receivable subledger, and complete the monthly bank reconciliations. He is beginning to think that this is a good idea as it would save one salary. On the other hand, he does want to maintain controls and is interested in eliminating all potential problems. He would like your recommendations about how he should deal with this including what could go wrong.

KBCC purchased equipment on January 1 five years ago for $190,000 and estimated a $10,000 salvage value at the end of the equipment's 10-year useful life. On March 31 of this year, the equipment was sold for $95,000. The last entry to record depreciation was at December 31 of the prior year. No entries for the sale have been made yet.

KBCC is a client of your accounting firm and you are the CPA in charge of the engagement. The year end for GBCC is December 31. It is now April 20 and you have been asked to provide a memo to your partner that can be used as the basis for discussion with Joel that addresses the issues that concern you and Joel. You must address all of the issues in depth and provide recommendations on how to account for them.

Required

Prepare the memo.