Chip & Charles Carroway, Carroway Clothing Limited (CCL) From:
Re: Current accounting issues, employment benefits and financing options. Thank you for the opportunity to address the current accounting issues, employment benefits and financing options facing Carroway Clothing Limited (CCL)
1. SR& ED and Development costs treatment:
In reviewing the financial statements it appears that the development costs and SR&ED treatment may not have been recorded appropriately. The SR&ED are tax credits to be used towards taxable income and should not have been recorded as government grants. Since CCL may not have needed them in the initial years, it can use SR&ED tax credits against taxable income in the future. It is necessary to identify all SR$ERD activities for proper recording practices so that the credits generated by the SR&ED can be used against future income.
The $975,000 development costs can be expensed or capitalized depending on if the following criteria are met The project is technically feasible
CCL intends of complete the project
CCL has the ability to use or sell the product
There is probability of future economic benefit will be generated Availability of adequate technical and financial recourses
CCL has the ability to measure reliably the expenditures attribute to it.
Since the Walton Work Wear line is in the production stage, its accumulated development costs should be capitalized. The Carroway Cool Top has not started it commercial production which would allow the development costs not to be amortized yet. Also interest costs on loans to generate financing for the R&D activates of a product can be capitalized rather than expensed. The capitalization of interest would allow CCL to reduce taxable income in the future when it is more profitable.
I would recommend that CCL make the above changes immediately so that the financail statements are not incorrect. These changes would help CCL reduce its...
Please join StudyMode to read the full document