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Assignment - Liabilities - CL+NCL

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Taha Javed
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2 views

Assignment - Liabilities - CL+NCL

For teachers

Uploaded by

Taha Javed
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Assignment

Q1. The following are selected transactions of Cramer’s Company. Cramer prepares
financial statements quarterly.

Jan. 3 Purchased inventory on account from Marshmallow Company, $24,000.


Feb. 2 Issued a 10%, 2-month, $24,000 note to Marshmallow Company in payment of
account.
Mar. 31 Accrued interest for 2 months on Marshmallow note.
Apr. 1 Paid face value and interest on Marshmallow note.
July 2 Purchased equipment from Marcus Equipment paying $15,000 in cash and signing a
10%, 3-month, $20,000 note.
Sept. 30 Accrued interest for 3 months on Marcus note.
Oct. 1 Paid face value and interest on Marcus note.
Dec. 1 Borrowed $20,000 from the Supreme Bank by issuing a 3-month, 11% note with a
face value of $20,000.
Dec. 31 Recognized interest expense for 1 month on Supreme Bank note.

Required:
(a) Prepare journal entries for the above transactions and events.
(b) Post to the accounts, Notes payable, Interest payable, and Interest expense.
(c) Show the balance sheet extract of notes and interest payable at December 31.
(d) What is total interest expense for the year?

Q2.A suit for infringement of patents, seeking damages of Rs. 2 million, was filed by a third party.
Entity’s legal consultant is of the opinion that an unfavourable outcome is most likely. On the basis of
past experience, he has advised that there is 60% probability that the amount of damages would be
Rs. 1 million and 40% likelihood that the amount would be Rs. 1.5 million.
Required: Briefly advise on measurement of above provision.

Q3.An entity has to rectify a serious fault in a major plant that it has constructed for a customer. The
individual most likely outcome for the repair to succeed at the first attempt at a cost of Rs. 200,000.
However, there is significant chance that second attempt would be necessary costing an additional
Rs. 80,000.
Required: Briefly advise on measurement of provision.

Q4.Quality Garments Limited (QGL) is a manufacturer of readymade garments. During May 20X4, a
fire broke out in one of its units which resulted in deaths and severe injuries to a number of workers.
At the time of finalisation of QGL's financial statements for the year ended 30 June 20X4, the following
issues pertaining to the fire are under consideration:
i. Families of certain deceased workers have filed compensation claims amounting to Rs. 60
million. A government agency has imposed a penalty of Rs. 35 million for negligence on the
part of the company. QGL's lawyers anticipate that the company would have to pay Rs. 20
million and Rs. 10 million to settle the workers' claims and the penalty respectively.
ii. To maintain goodwill of the company, the Board of Directors is considering additional
payments to the families of the deceased workers amounting to Rs. 25 million.
iii. Loss to fixed assets and inventories is estimated at Rs. 60 million. In this respect, a fire
insurance claim has been lodged. Due to certain policy clauses, QGL’s consultant anticipates
that the claim for Rs. 15 million may not be accepted. The matter is under negotiation with
the insurance company.
iv. Due to closure of the unit for repair, QGL would not be able to meet sales orders of Rs. 50
million. This will reduce QGL's profitability for the half year ending 31 December 20X4 by Rs.
10 million.
Required:
Discuss how the above issues should be dealt with in the financial statements of QGL for the year
ended 30 June 20X4. Support your answers in the context of relevant International Financial
Reporting Standards.

Q5. On July 1, 2012, Beta Corporation issued $3,000,000 face value, 9%, 3-year Bonds. Investors
require an effective interest rate of 11%. Beta corporation uses the effective interest rate method to
amortize bond premium or discount. The bonds pay semi-annual interest on January 1 and July 1.
a. Prepare the journal entry to record the issuance of the bonds on July 1, 2012.
b. Prepare an amortization table for this bond issue.
c. Prepare the journal entry to record the accrual of interest and the amortization of discount
on December 31, 2012.
d. Prepare the journal entry to record the payment of interest and the amortization of discount
on July 1, 2013, assuming no accrual of interest on June 30, 2013.
e. Suppose two years after the issuance of bonds, Beta Corporation extinguishes the bond
liability on July 1, 2014, by giving the creditor, real estate with a fair value $2,950,000. The
real estate has a carrying of $3,500,000 in the books of Beta Corporation. Record this
transaction in the books of Beta Corporation

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