Candelabra Limited (CL) is a manufacturing company that is privately owned. The company's production facilities produce a

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Candelabra Limited (CL) is a manufacturing company that is privately owned. The company's production facilities produce a significant amount of carbon dioxide, and currently the town is suing CL for polluting the surrounding area. The company is enjoying a period of significant prosperity and earnings have been steadily increasing. CL plans to double in size within the next 10 years. The production facility was financed by a 100-year bond that pays 5% interest annually. The bond includes a covenant that stipulates that the debt to equity ratio must not exceed 2:1. The debt to equity ratio is currently just below this threshold. The government has recently introduced a system to control pollution whereby each company is allocated a certain number of "carbon credits." The carbon credits allow the company to produce a certain amount of carbon dioxide as a by-product from its production facilities. CL has been allocated a fixed number of these credits by the government at no cost. If CL produces more carbon dioxide than allowed, it will have to pay a fine. CL is pretty sure that it will exceed the amount allowed under the government-allotted carbon credits. Many companies in the surrounding area have extra carbon credits and as a result, the government has established an informal marketplace whereby companies can trade their extra credits. The value of the contracts changes depending on supply and demand. CL has purchased several carbon credit contracts in the marketplace just in case. At the time it acquired the contracts, there was an oversupply and so CL was able to acquire them at very little cost. Currently, demand for the credits has increased significantly. As another backup plan, CL is investigating diverting excess carbon dioxide to an underground cave that is situated on company-owned property. Currently, CL has spent a significant amount of funds to investigate the feasibility of diverting and storing the extra carbon dioxide it produces. The engineers working on the project are still not convinced of the feasibility of this type of storage on a larger scale. At present, they have started to store some excess carbon dioxide there on a test basis. In order to fund the work on the cave, the company has issued shares. The shares are redeemable in cash at the company's option if its carbon dioxide levels (excluding any amounts that will be stored in the cave) reach a certain point. The shares are currently held by a large pension company.

Instructions

Assume the role of CL's auditors and analyze the financial reporting issues. Please note where there are differences between IFRS and ASPE.

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Related Book For  book-img-for-question

Intermediate Accounting

ISBN: 978-1118300855

10th Canadian Edition Volume 2

Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield, Nicola M. Young, Irene M. Wiecek, Bruce J. McConomy

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