Metal Caissons Limited (MCL) was incorporated on December 15, Year 8, to build metal caissons, which are large containers used for transporting military equipment. John Ladd (president) and Paul Finch (vice-president) each own 50% of MCL’s shares. Until September 30, Year 9, MCL’s first fiscal year-end, they applied their energy to planning and organizing the business. John and Paul developed the product, sought government assistance, designed the plant, and negotiated a sales contract.
In October Year 9, MCL signed a $7.5 million contract with the Canadian
Department of National Defense (DND). The contract stipulates that MCL must deliver one caisson to DND on the first business day of each month over a period of five years, commencing on April 1, Year 10. Any delay in delivery entails a $2,000 penalty per day, per caisson delivered late, up to a maximum of $50,000 per caisson. DND has the right to cancel its contract with MCL at any time if the company is unable to meet its commitments. The caissons must be manufactured according to DND’s detailed plans and specifications. Any caisson not meeting the specifications will be rejected, thereby causing a delay in delivery.
Prepare the memo requested by the partner.