You have just been hired as an accounting advisor by Road Safety Incorporated (RSI), a company that manufactures road safety equipment ( e. g., crash barriers, traffic lights, and electronic information signs). RSI was founded in 20X4 and has grown rapidly over the last five years. In 20X7, the company had its first profit with annual sales of over $ 8 million, which is the highest level of sales in the company’s history, and taxable income of $ 3 million.
RSI has needed to raise financing to develop a new product, “traffic sensors,” which will identify traffic jams and warn motorists through the company’s electronic information signs of problems and alternative routes. Part of the funding for product development has come from a bank loan. The bank requires an annual audit and specifies a maximum debt-to- equity ratio. At the end of 20X6, RSI was close to the maximum debt- to- equity ratio. This year will be the first year that RSI will have an audit completed.
You have just completed a meeting with the President of RSI, Nancy O’Callaghan. Nancy and other family members own all of the Class A common shares in RSI. They have 10 votes per share. During that meeting, she made the comments below. Nancy has requested that you drat a memo to her identifying alternative accounting policies as well as your overall recommendations for each issue.
Part A: Prepare the report for Nancy, assuming RSI is a public company.
Part B: Prepare the report for Nancy, assuming RSI is a private company and will use ASPE.