SWO Ltd. (SWO) is a manufacturing company located inSouthwestern Ontario, which is publicly traded on the Toronto StockExchange. The company designs and develops stereoequipment. Your accounting firm recently began to be theauditor of SWO. You are a senior accountant with the firm,and have been assigned the year-end audit for SWO. Yourfirms partner has just met with the companys management in earlyJanuary, 2018, and discussed various accounting issues. Thepartner asked you to prepare a report to be provided to the clientthat addresses some of the accounting issues occurred in2017. These accounting issues are listed as follows:

1. During 2017, SWO purchased the 15% equity of an electronicsupplier. SWO provides technical support to the suppliersoperations and participates in its policy making. Recently thesuppliers business costs were significantly increased, resultingin substantial losses and shortage of cashflows.

2. SWO provides a ten-year warranty with all equipment sales.The warranty covers all defects and breakdowns that are notdirectly related to regular wear and tear. Based on theexperience, SWO estimates the probability of an equipment making awarranty claim during the next 10 year of coverage is as follows:Year 1 2 3 4 5 6 7 8 9 10

1% 2% 2% 5% 5% 10% 12% 15% 18% 20% The average retail value per claim is $100 currently and increasesby 3% every year. The average cost of parts and service at SWO is about 60% of the retailvalue. Theeffective interest rate is 6%.

3. At the beginning of 2017, the company granted options to themanagement to purchase 80,000 common shares. The options canbe exercised any time within the next five years at a strike priceof $5 per share. The company expects that the period ofbenefit/service for these options is three years. The fairvalue of the options, as determined using an option pricing model,is $900,000.

4. On July 1, 2017, the company issued 20,000 preferred sharesfor $10 per share to an investment bank. Each preferred shareis convertible for a fixed number of common shares and has amandatory 5% annual dividend that must be paid on December 31 ofeach fiscal year. These preferred shares must be redeemed bythe company for cash if the market price of common shares exceeds$10 per share. Currently, the common shares are in tradingrange around $6 per share.

5. On September 15, 2017, the company entered into a forwardcontract with the Bank of Vancouver by locking the price of 600,000kg of aluminum at $1.50/kg. Aluminum is used in theproduction of stereo equipment. As at December 31, the priceof aluminum is trading on the Chicago Board of Trade at$1.25/kg