Notes to the Financial Statements
1. ORGANIZATION, BUSINESS OPERATIONS AND GOING CONCERN
CN RESOURCES INC. (“
the Company
”) was incorporated in Nevada of the United States of America on May 18, 2010. The Company is in the development stage as defined under the Financial Accounting Standards Board codification 915 “Development Stage Entities” and it intends to identify, acquire, explore and develop natural resources properties in Alberta, Canada. The Company has not generated any revenue to date except interest income and consequently its operations are subject to all risks inherent in the establishment of a new business enterprise.
Going Concern
The financial statements have been prepared on a going concern basis which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Company has incurred losses for the year ended May 31, 2013 of $92,510 and has an accumulated deficit of $273,827 since inception; further losses are anticipated in the development of its business raising substantial doubt about the Company’s ability to continue as a going concern. The ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management intends to finance operating costs over the next twelve months with existing cash on hand and loans from director and or private placements of common stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Presentation
The financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America and are presented in US dollars. The financial statements reflect all adjustments that, in the opinion of management, are necessary in order to make the financial statements not misleading. Management’s opinion that all adjustments necessary for a fair statement of the results for the interim periods have been made, and all adjustments are of a normal recurring nature.
b) Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States necessarily requires management to make estimates and assumptions that affect the amounts reported in the financial statements. We regularly evaluate estimates and judgments based on historical experience and other relevant facts and circumstances. Actual results could differ from those estimates.
c) Cash and cash equivalents
Cash equivalents are highly liquid investments with an original maturity of three months or less.
d) Income taxes
Potential benefits of income tax losses are not recognized in the accounts until realization is more likely than not. The Company follows ASC 740 “Accounting for Income Taxes,” under which the Company computes tax assets benefits for net operating losses carried forward. Potential benefits of net operating losses have not been recognized in these interim financial statements because the Company cannot be assured it is more likely than not it will utilize the net operating losses carried forward in the future years.
At May 31, 2013, the Company had no unrecognized tax benefits. Management does not believe unrecognized tax benefits will significantly change within twelve months of the reporting date. Interest and penalties related to income tax matters are recognized in income tax expenses. As of May 31, 2013 there is no accrued interest related to uncertain tax positions.
e) Basic and Diluted Net Loss per Common Share
Basic net loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. In periods when losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.
f) Foreign currency translation
The financial statements are presented in United States dollars. Foreign denominated monetary assets and liabilities are translated into their United States dollar equivalents using foreign exchange rates which prevailed during the year. Gains or losses resulting from foreign currency transactions are included in results of operations.
g) Oil and Gas Property and Exploration Costs
The Company is in the exploration stage and has not yet realized any revenue from its planned operations. It is primarily engaged in the proposed acquisition, exploration, and development of the Prospect and the extraction of crude oil and natural gas located there under. The Company applies the successful efforts method of accounting for oil and gas properties. Under this method, exploration costs such as exploratory geological and geophysical costs, delay rentals and exploratory overhead are expensed as incurred. Costs to acquire mineral interests in crude oil and natural gas properties, drill and equip exploratory wells that find proved reserves, and drill and equip development wells are capitalized. Acquisition costs of unproved leaseholds are assessed for impairment during the holding period and transferred to proved oil and gas properties to the extent associated with successful exploration activities. Significant undeveloped leases are assessed individually for impairment, based on the Company’s current exploration plans, and a valuation allowance is provided if impairment is indicated. Capitalized costs of producing crude oil and natural gas properties, along with support equipment and facilities, are amortized to expense by the unit-of-production method based on proved crude oil and natural gas reserves on a field-by-field basis, as estimated by qualified petroleum engineers.
h) Long-lived Assets
In accordance with FASB accounting standard "Accounting
for the Impairment or Disposal of Long-Lived Assets",
the carrying value of long-lived assets is reviewed on a regular basis for the existence of facts or circumstances that may suggest impairment. The Company recognizes impairment when the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset. Impairment losses, if any, are measured as the excess of the carrying amount of the asset over its estimated fair value.
3. OIL AND GAS PROPERTIES
On March 1, 2013, the Company entered into an agreement with RedWater Energy Corporation to form a joint venture to drill in the Redwater area in Alberta, Canada. The Company agreed to pay 50% of the drilling cost to acquire a 50% working interest in the unproved property. The aggregate cost of the well is estimated to be $672,787. As of May 31, 2013, the Company exchanged the $292,890 note receivable on the balance sheet at May 31, 2012 for the working interest in the well. In addition, the President of the Company invested $126,625 on behalf of the Company in the form of a related party payable. The payable is non-interest bearing and due on demand. Included in the total $419,515 paid to RedWater Energy Corporation was $71,237 for the Company’s portion of the land acquisition cost.
As of May 31, 2013, the well is currently being completed and whether the well has commercial production potential is not known, thus, the Company has accounted for the cost of this oil and gas property as unproved properties.
4. COMMITMENTS
On March 1, 2013, the Company entered into an agreement with RedWater Energy Corporation (see note 3). The Company agreed to loan RedWater Energy Corporation the other 50% of the drilling cost in the form of a note. The loan will bear interest at 10% per annum payable quarterly, is redeemable at any time without penalty, and shall be secured by a general security agreement of RedWater Energy Corporation in favour of the Company. The Company will receive an additional 10% working interest of the property until the loan is repaid in full. As of May 31, 2013, the Company has not funded this note.
In addition, the Company will undertake additional estimated completion costs of $75,980, that is payable once the Drilling Program is successful. As of May 31, 2013, the well is unproved, thus, it is not necessary to accrue for these additional cost.
5. DUE TO DIRECTOR
The director loans the company money from time to time on an interest-free due-on-demand basis. As of May 31, 2013, the total amount advanced and unpaid is $190,718 (May 31, 2012 - $44,499).
6. INCOME TAX
Potential benefits of income tax losses are not recognized in the accounts until realization is more likely than not. The Company has incurred a net operating loss of $273,827 from inception through May 31, 2013 which expires in 2032 and 2033. The Company has adopted ASC 740, "Accounting for Income Taxes", as of its inception. The Company is required to compute tax asset benefits for non-capital losses carried forward. The potential benefit of the net operating loss has not been recognized in these financial statements because the Company cannot be assured it is more likely than not it will utilize the loss carried forward in future years.
Significant components of the Company's deferred tax assets are as follows as of:
|
|
May 31, 2013
|
|
|
May 31, 2012
|
|
Deferred Tax Asset
|
|
$
|
93,101
|
|
|
$
|
61,648
|
|
Valuation Allowance
|
|
$
|
(93,101
|
)
|
|
$
|
(61,648
|
)
|
Net Deferred Tax Asset
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|
$
|
—
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|
|
$
|
—
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|