The case asks for us to prepare a memo that summarizes the changes and recommendations needed for the significant accounting issues.

CASE QUESTION OLIVER EVERGREEN LIMITED Oliver Evergreen Limited (\"OE\") is a small public company which was founded in 2013 by Jay Sonak, a chemical engineer, and completed its IPO in 2015. Jay is the President, Chief Executive Officer and Chief Technology Officer of OE. OE develops environmental and energy efficient technologies. The Company has a laboratory and manufacturing plant on its premises and is located in Olonto, Ontario. As a result of Jay's prior experience of working in an R&D laboratory for an oil company and managing a pulp and paper company, he developed several technologies focusing on energy-saving measures, including a device named B64. B64 reduces energy consumption in pulp and paper plants. The sales of B64 have generated significant revenue for the company. The revenues generated have been reinvested into research and development, resulting in new products being developed. Two new products are currently on the verge of commercial production. For details on these products refer to Exhibits I and II. In order to continue growing, OE has managed to obtain funds from an operating loan which is secured by accounts receivable and inventory. As a result of the significant costs of new technologies being developed, the revenues from existing technology sales are no longer sufficient to maintain OE's profitability. Jay has been informed that OE's Board of Directors is concerned with OE's recent quarterly results. However, Jay is maintaining his optimism as he is hoping that one of OE's new technologies will be licensed to a third party in the near future. Tyler & Descartes, LLP, public accounting firm (\"T&D\"), a national firm, has recently been appointed auditors of the company. The previous auditor was York & Cartier, LLP, public accounting firm (\"Y&C\"). Y&C were replaced when the audit came up for renewal and T&D quoted a lower fee during the tender process. OE's year end is December 31 and the company's financial statements are prepared by a fulltime bookkeeper. The company successfully transitioned to international financial reporting standards in fiscal 2017. It is now mid November 2020. You, CPA, CA, work for T&D and have gathered the information contained in Exhibits I to III. To prepare for the upcoming audit planning meeting, the partner has asked that you prepare a memo which analyzes and provides recommendations regarding OE's significant accounting issues based on the information provided in Exhibits I and II. Also, Jay has requested that T&D analyze the new inventory costing system (described in Exhibit III) for potential weaknesses and improvements. The partner has asked that your analysis and recommendations related to this system be included in the above memo. You are not required to discuss the audit related issues related to the upcoming audit engagement and accounting recommendations. Adapted from Chartered Professional Accountants of Ontario Exhibit I Information Regarding Operating Line, Degarbager and Energy Audit Operating Line Under the terms of OE's credit facility, the company is required to maintain a minimum current ratio and a maximum debt to equity ratio. Deferred development costs are excluded from all ratio calculations relating to the banking terms. As a result of the bank deeming OE as a high risk customer, the operating line is at prime plus 3%. The prime rate is currently 4%. Degarbager The company has recently developed a technology which converts municipal garbage into heat, leaving only safe compact waste. It is called the Degarbager. Municipalities have been hesitant to invest in this new and unproven technology, as it has only been tested in a small-scale lab using a capacity of 3 metric tonnes per day of garbage. Given the public's increasing concern over environmental issues, municipalities are open to exploring the feasibility of the idea. With no commercial purchasers willing to assume the risk, Sonak proposes to provide equipment with a 40 tonne/day capacity to the city of Olonto, at no cost. The equipment will be used to demonstrate the technology to other prospective municipalities in the hopes of future sales. Installation of the equipment has already started. The city will provide the land where the equipment will be located. In addition, the city will be given an option to purchase the equipment for a discounted price of $2.8 million at any time over the next three years. (Sonak expects that any additional sales of the Degarbager will be priced to earn at least a 20% gross profit margin.) However, OE will be obligated to remove the equipment and place the land back to its original condition in three years if the city does not exercise the option. Some members of city council, who are concerned with environmental issues, have voiced their support to exercise the option and purchase the equipment. Other council members have been more skeptical and want to review the results of the trial before making any decisions. Sonak has been working on developing and installing the equipment since the beginning of July and plans to have the equipment operational by year end. With respect to financing, Sonak has secured a $2 million loan at 7% (level of risk equal to the level of risk assessed by the bank) from a national environmental group called Energytech that provides capital to companies developing new technologies directed at reducing waste and promoting more efficient energy sources. The funds were received on July 2. The loan will be secured by the equipment and repayable in equal principal instalments over five years and interest is payable monthly. However, if the equipment is purchased by the city of Olonto, the loan is repayable in full at that time. During the trial period, OE plans to improve the technology. Jay Sonak is unsure how to account for the costs incurred to further develop and install the Degarbager and the related interest costs in the 2020 financial statements. Adapted from Chartered Professional Accountants of Ontario Exhibit I (continued) Information Regarding Operating Line, Degarbager and Energy Audit The estimated costs for the construction, installation and subsequent removal of the equipment are as follows: a) Remaining development costs for improvements - Note 1 $ 145,000 b) Cost of unit: Note 1 Labour to assemble Components - Note 2 Transportation to site $ 487,000 2,152,000 86,000 $ 2,725,000 c) The costs to place the land back to its original condition if the city does not exercise the option are estimated as follows: Note 3 and Note 4 Dismantlement of the equipment $50,000 Removal costs 59,000 Environmental remediation 35,000 Costs to grade the land, lay sod, etc. 30,000 $174,000 Notes on estimated costs: Note 1: These costs are expected to be all incurred by December 31, 2020. Note 2: The components cost of the unit include only direct materials. It is estimated that cost of supplies and direct overhead will be an additional 15% of the component cost. Note 3: The other estimates are based on internal costs, including direct overhead, and are in current dollars; and Note 4: Inflation of industrial costs is estimated to be 2.2% per annum over the next five years. Adapted from Chartered Professional Accountants of Ontario Exhibit II D340 Hydrolator D340 Hydrolator Another product that OE has developed is the D340 Hydrolator. This device is designed to save electricity costs during a particular process at chemical-processing plants. The device will sell for $145,000. Customers will be required to pay the full amount of $145,000 on delivery. However, the selling price may be adjusted, since according to OE's sales proposal, a purchaser will receive a \"missed savings benefit\