Forestry Inc. (FI) is a private company that operates in the forest products business. It has two divisions. The first division is the forest operations where the company owns and grows large tracts of timber. The second division is the sawmill operations where it manufactures lumber and building materials. FI has a stock option plan to compensate its top employees based on net income. At the start of 20X5 FI had a bank loan with Canadian Big Bank. FI is restricted from declaring dividends until this loan is repaid. Last year the owners were approached by a public company to buy the shares of the corporation. The owners are considering this offer as well as going public and offering more shares to investors as a public company. The shares currently are owned only by the owners, a few private investors and employees through the stock option plan. You have recently been hired to develop new accounting policies for FI’s 31 December year-end. You have been asked by the board to discuss alternatives and provide recommendations on the appropriate accounting policies for events that have occurred during 20X5. In addition, the board would like to know the impact on their accounting policies if they decided to adopt IFRS for these issues and their financial statements. Where possible, you have been asked to quantify the impact of the accounting policies. The incremental borrowing rate for FI is 10%. In 20X5, FI was able to renegotiate its bank loan and replace it with a new loan without a restrictive covenant. The new bank requires annual audited financial statements. The loan is payable immediately if FI exceeds a debt to equity ratio of .65. At the end of 20X5 the debt to equity ratio was .60. The old loan had unamortized transaction costs and financing fees of $800,000. The transaction costs and financing fees associated with the new loan are $1.2 million. The new loan is substantially larger than the old loan to assist with the construction of a new sawmill facility. In 20X5, a lawsuit was filed by residents near one of the timberlands that were sprayed with pesticide to prevent a beetle infestation. The residents claim that the pesticides contain a cancer-causing ingredient. FI consulted its lawyers who agree that medical studies support those claims. Construction of the new sawmill started in February 20X5. At the end of 20X5 costs of $6 million had been incurred. Construction is anticipated to take until November 20X6. Construction costs are estimated to be $100 million. In October 20X5, one of the trades went on a strike. The strike shut down construction and lasted two months. FI has long-term supply contracts with a number of large building centres where the company is required to deliver a set amount of lumber each month. If the minimum quantity of lumber is not delivered, FI is required to pay a penalty. In 20X5, FI has not been able to fulfill all orders because of a shortage of lumber due to a beetle infestation; FI anticipates incurring penalty costs of $250,000 until the new sawmill is completed. Once the new plant is completed, FI anticipates being able to meet the demands of its long-term supply contracts and regular customers. FI sells its lumber to local building centres as well as through agents. FI is paid for the lumber 30 days after delivery. FI uses an agent to sell its lumber overseas. FI pays a set fee to the agent. The agent sells the lumber and deposits the money electronically in FI’s account net of its fee. Government legislation requires FI to reforest all lands in 15 years when the timber is harvested. FI estimated the cost will be $2.5 million to reforest the timber harvested in 20X5. FI discovered a beetle infestation at the sawmill when employees went to convert the timber into lumber. FI anticipates that $5 million of timber was infested. The timber could not be used for lumber but it could be sold to be processed into wood chips for fuel. The estimated value of the timber being sold for wood chips is $1 million. FI issued bonds for $10,000,000 on 1 January 20X5, to help fund the construction of the new sawmill. The five-year bond pays interest of 8% semi-annually each 30 June and 31 December. Instructions Please prepare case report outlining all 8 accounting/financial reporting issues

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ANS WER Account ing and Financial Reporting Issues for Forestry Inc 1 Stock Options Forestry Inc has a stock option plan that compens ates its top employees based on net income Accounting for stock op... View the full answer