Rosanne Incorporated (RI) is a private corporation formed in the 1990s. RI develops and sells Rosanne for many purposes; theft recovery, data and device security, and IT asset management. To help motivate management, RI has a stock opinion plan. To help fund continued Rosanne development, RI 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 of 3 to 1.

RI has an expected taxable loss of $10,000,000 in 2020. For the last three years the company has had taxable profits of $2,000,000 in 2017; $5,000,000 in 2018, and $1,000,000 in 2019. RI's taxable loss this year was due to intensive development of new Rosanne for security over personal data. RI anticipates sales of this product to be significant due to concerns over identity theft.

You have recently been hired to develop new accounting policies for RI's December 31 year-end. You have been asked by the owners to discuss alternatives and provide recommendations on the appropriate accounting policies for events below that have occurred during 2020. Where possible, you have been asked to quantify the impact of the accounting policies. RI is seriously considering going public next year and would like to know how your recommendations would be different if it was a public company. The incremental borrowing rate for RI is 10%. The tax rates for the last few years were 2017 (38%), 2018 (39%), and both 2019 and 2020 (40%).

1.RI currently uses the taxes payable method of accounting for income taxes. In 2019, RI changed its method of accounting for Rosanne development from expensing to capitalizing as an intangible asset

2.In December 2020,Thomas Cook, president of RI, has just returned from an annual visit with the company's bank. The bank expressed concern over RI's profitability and debt level. In an effort to alleviate the bank's concerns, Thomas proposed to sell an equipment to a local finance company, provided Cook is able to lease it back. The equipment was purchased two years ago from a Japanese manufacturer for $1,000,000 and is being depreciated at 15% per year on a declining-balance basis. Due to the rise in the value of the Japanese yen relative to the Canadian dollar, Thomas estimates that the machinery is currently worth $1,500,000. He has approached Mr. Harvey, president of Harvey Financial Services Ltd. (Harvey's), who indicated that he would be willing to purchase the equipment for $1,500,000 and lease it back to Cook for $274,252 per year for the next 10 years, payable at the end of each year. Cook would have the option to repurchase the asset at the end of the lease term at its estimated fair value of $500,000, as it would be usable for at least another five years. Thomas thinks Harvey is getting a pretty good deal, as he estimates Cook's cost of capital to be 12%. However, Mr. Harvey indicated over lunch, "Hey, I gotta earn 15% or I just don't make no money on this lease!" Thomas is eager to complete the transaction in an effort to improve the company's profitability (by recording the gain on the sale of the equipment) and to concurrently reduce the company's debt level (by using the sale proceeds to pay down a loan of $1,500,000 with a 12% interest rate).

3.RI offers a warranty with its theft recovery Rosanne. If a computer equipped with the Rosanne is stolen and RI 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 2019 were $8 million. During 2020, the estimated warranty costs based on a percentage of sales will be an additional $5 million. Actual warranty costs during 2020 were $1 million.

4.On January 1, 2019, RI had issued $ 10,000,000 of 5% five year convertible bonds for total proceeds of $ 10,900,000. The bonds pay interest each December 31. The total proceeds were allocated to the liability account. The company has always amortized the premium using the straight line basis. The amortization of premiums is a permanent difference for tax calculations.

5.RI has installed a series of satellite towers as part of its Rosanne-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.

Required:

Prepare the requested report.