You are the accounting manager of HK co., a private company located in Quebec. SKI follows ASPE and has an August 31^st year end.HK distributes products for the downhill ski and snowboarding markets. SKI's bank requires audited financial statements and requires it to maintain a debt to equity ratio lower than 0.5.

The company was purchased a couple of years ago and the owner has hired a research team to develop some of its own products.The team is excited about a new product, SKIdat. It is a smart device that attaches to a skier helmet and would provide data on the skier's speed, route, altitude, provide route suggestions, as well as take video and photos.

HK expensed $200,000 in the 2019 fiscal year in relation to the HK product research.During the current 2020 fiscal year, the research team incurred a further $850,000 to get a fully functioning prototype completed in March.Market research was completed that showed a solid market for the product. Since March, a further $400,000 has been spent on engineering costs to fine-tune the product to make it manufacture ready. SKI is currently negotiating with the bank for a loan to purchase equipment to be able to manufacture the product for sale.

It is now late August and you are preparing for the upcoming August 31^st 2020 year end. You have been asked to prepare memo to the CFO on your recommendations for the accounting for the HK expenditures.

Required

Prepare the memo to the CFO.