Precision Incorporated (PI) is a private corporation formed in the early 2000s. PI develops and sells software for many purposes; theft recovery, geomapping, data and service security, and IT asset management. To help motivate management, PI has a stock option plan.

To help fund continued software development, PI has a bank loan with a major bank. The bank requires annual audited financial statements and has a financial covenant that stipulates a minimum current ratio.

PI has an expected taxable loss of $10,000,000 in 2018. For the last three years, the company has had taxable profits of $2,000,000 in 2015, $5,000,000 in 2016, and $1,000,000 in 2017. PIs taxable loss this year was due to intensive development of new software for security over personal data. PI anticipates sales of this product to be significant due to concerns over identity theft.

You have been recently hired to develop new accounting policies for PIs December 31 year-end. You have been asked by the owners to discuss alternatives and provide recommendations on the appropriate accounting for events below that have occurred during 2018. Where possible, you have been asked to quantify the impact of the accounting policies. The incremental borrowing rate for PI is 10%. The tax rates for the last few years were 2015 (38%), 2016 (39%), and both 2017 and 2018 (40%).

1. PI offers computer theft recovery and secure asset-tracking services. These services are provided for a period of one to five years. The customer pays a fee that includes software, monitoring, and maintenance. The fee is due 30 days after installation of the software. Sales staff are paid a commission based on the number of service contracts they sell.

2. PI offers a warranty with its theft recovery software. If a computer equipped with the software is stolen and PI is unable to recover the stolen software using its software or delete data on the stolen computer, then the customer is eligible for a warranty of up to $1,000. To qualify customers must file a police report. The amount of the warranty depends on the value of the stolen computer. Estimated warranty liabilities on the balance sheet at the end of 2017 were $8 million. During 2018, the estimated warranty costs based on a percentage of sales will be an additional $5 million. Actual warranty costs during 2018 were $1 million.

3. PI currently uses the taxes payable method of accounting for income taxes. In 2017, PI changed its method of accounting for software development costs from expensing to capitalizing an intangible asset.

4. PI has installed a series of satellite towers as part of its software- tracking services at a cost of $15 million, There is a regulatory obligation to dismantle these satellite towers in 20 years. The anticipated cost at that time is $2.5 million.

5. PI issued $15,000,000 convertible bonds, 8% semi-annual dividend on January 1, 2018. The bonds were issued for net proceeds(cash) of $14,800,000. The bonds are convertible at the bondholders options in 10 years into class A common shares at the rate of 70 shares for each $1,000 bond.

6. On November 20, 2018, an employee filed legal action against PI for $150,000 for wrongful dismissal. Management believes that the action to be frivolous and without merit. This opinion is shared by the corporate lawyer involved in the matter. The likelihood of payment to the employee is remote.

7. PI is seriously considering going public next year and would like to know how your recommendations above would be different if it was a public company. In addition, PI would like to know about the disclosures of earnings per share (if any) that would be required if it became public.

Required: prepare the requested report with 2-3 main points per event.