Thor Ltd. (TL) is a Canadian company that produces, sources, and supplies agriculture products, including farm equipment, fertilizer, and seed. These products are sold to large and small distributors across Canada. TL deals with some large farm accounts directly.

Sales volumes are healthy and stable, but profit margins are thin and have been squeezed by rising fuel prices. Transportation is a major cost item. James Watkins manages a project for TL. He is paid a salary of $ 60,000 and has been promised a bonus of 100,000 performance units if this project breaks even in the current period. Performance units are the bonus system used by TL. Units must be held for three years and are then assigned a value based on a formula that considers the overall profit performance of the company, along with key customer and employee satisfaction data. In the last valuation round, one unit was worth $ 3.15.

The project is a no- tillage agricultural precision planting system called Land- Plant. It is a patented process over which TL owns the world patent rights. This system minimizes moisture loss, makes rich topsoil less likely to be blown or washed away after planting, and reduces the release of carbon dioxide (a greenhouse gas) into the environment. Since the latter is a major goal of the Kyoto accord, the federal government has announced that Canadian farmers could get funding of up to $ 1 billion for adopting such zero- plowing systems and adopting other energy- saving practices. For farmers, the system also allows lower operating costs, precision planting, decreased soil compaction, and more precise application of needed fertilizers. While there are several no- till or low- till technologies on the market, TL’s product line is of high quality and is being very well received at agricultural shows. Land- Plant is capable of placing seed and fertilizer in optimal relative positions while leaving 90% of the surface undisturbed. Costs of the project to date (in thousands):

1. The production equipment is expected to have a service life of eight years, or approximately 18,000 manufacturing hours. It was used in the third and fourth quarter of the current year, for 570 hours.

2. The expenditure on manufacturing equipment will entitle TL to an investment tax credit (income tax relief) equal to 20% of the cost of the equipment.

3. Quality concerns with the initial units produced led them to be scrapped.

4. Watkins’ salary is $ 15 per quarter, plus an administrative fee of $ 20 for overall supervision and accounting/ systems support.

5. In the third and fourth quarter, a total of 48 good units of the 3300T Land- Plant system were produced. These costs exclude amortization on related assets.

Financing of this project was uncertain until the third quarter of the current year. While TL’s Board of Directors has been very enthusiastic about the project, and has funded the development work, TL had no deep well of financing as would be needed to finance the project. Then, late in the second quarter, TL was approved as an Eligible Business Corporation under the provincial Small Business Venture Capital Act. This allowed the company to issue 50,000 preferred shares in a private placement at $ 100 per share. The individual shareholders are entitled to a 30% investment tax credit on their investment. These shares were successfully issued in the third quarter. This funding plus a lending arrangement secured the project and production was geared up.

Watkins has requested a preliminary income statement, along with a discussion of the accounting issues. He knows that any income statement used for performance evaluation will have to be in accordance with GAAP, as it will be based on the information that is used for external reporting and TL’s lenders require GAAP financial statements. The tax rate is 40%.

Required: 

Prepare the information requested by Watkins.

Part A: Assume that TL will adopt accounting standards for public companies.

Part B: Assume that TL will adopt accounting standards for private companies.

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Description Year Quarter Quartr Quat Quarter $1,698 Development costs Legal costs re: patent Independent product testing Production planning Market research Sales and marketing support Production set-up Production training Production equipment (1), (2) Production cost over-runs (3) Administrative costs (4) Production costs (5) 134 $60 10 82 156 $ 18 20 47 12 56 $76 29 3,423 225 35 35 366 1,914 35 35 35