You are the accounting manager of SKI Co., a private company located in Quebec. SKI follows ASPE and has an August 31styear end. SKI 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.
SKI expensed $200,000 in the 2019 fiscal year in relation to the SKIdat 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 upcomingAugust 31st 2020 year end. You have been asked to prepare a memo to the CFO on your recommendations for the accounting for the SKIdat expenditures.
Prepare the memo to the CFO.