Explain why a provision should be made for the cost

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Reference no: EM133364414


Magna is a company that carries out many different activities. It is proud of its reputation as a "caring" organization and has adopted various ethical policies towards its employees and the wider community in which it operates.

As part of its annual financial statements, the company publishes details of its environmental policies, which include setting performance targets for activities such as recycling, controlling emissions of noxious substances and limiting the use of non-renewable resources.

The company has an overseas operation that is involved in mining precious metals. These activities cause significant damage to the environment, including deforestation.

On April 1, 2014, the company incurred a capital cost of $100 million in respect of the mine and it is expected that the mine will be abandoned in eight years' time.

The mine is situated in a country where there is no environmental legislation obliging companies to rectify environmental damage and is it very unlikely that any such legislation will be enacted within eighty years.

It has been estimated that the cost of cleaning the site and re-planting the trees will be $25 million if the replanting were successful at the first attempt, but it will probably be necessary to make a further attempt, which will increase the cost by a further $5 million. The company's cost of capital is 10%.


A. Explain why a provision should be made for the cost of cleaning the site.

B. Prepare necessary journal entries for the period April 1, 2014 - March 31, 2015.

C. Prepare the extracts of the financial statements for the year ended 31 March 2015.


Company T's directors decided on 3 May 2014 to restructure the company's operations as  follows:

  • Factory Z would be closed down and put on the market for sale.
  • 100 employees working in factory Z would be retrenched on 31 May 2014 and would be paid their accumulated entitlements plus 3 months' wages.
  • The remaining 20 employees working in factory Z would be transferred to factory X, which would continue operating.
  • Five head-office staff would be retrenched on 30 June 2014 and would be paid their accumulated entitlements plus 3 months' wages.

As at the end of Company T's reporting period, 30 June 2014, the following transactions and events had occurred:

  • Factory Z was shut down on 31 May 2014. An offer of $4 million had been received for factory Z but there was no binding sales agreement.
  • The 100 retrenched employees had left and their accumulated entitlements had been paid.  However, an amount of $76 000, representing a portion of the 3 months' wages for the retrenched employees, had still not been paid.
  • Costs of $23 000 were expected to be incurred in transferring the 20 employees to their new work in factory X. The transfer is planned for 14 July 2014.
  • Four of the five head-office staff who have been retrenched have had their accumulated entitlements paid, including the 3 months' wages. However, one employee, Jerry Perry, remains in order to complete the administrative tasks relating to the closure of factory Z and the transfer of staff to factory X.
    Jerry is expected to stay until 31 July 2014. His salary for July will be $4000 and his retrenchment package will be $13 000, all of which will be paid on the day he leaves. He estimates that he would spend 60% of his time administering the closure of factory Z, 30% on administering the transfer of staff to factory X, and the remaining 10% on general administration.


A. State if each of the costs identified above should be provided for. Give reasons for your answers.  Include calculations where necessary.

B. Calculate the amount of the restructuring provision if any.

Question 3

Honey Crunch Limited started its business in 2018. It is now 2021 and the Board of Directors of Honey Crunch Limited hired Aegis Solutions to recommend how each of the following types of accounting changes or errors should be dealt with.

As an audit assistant for Aegis, provide Honey Crunch with this information. For each issue, a note is written for the audit file (three to five sentences) identifying the type of accounting change or error, the appropriate accounting treatment, including amounts where applicable and how net income would be impacted if the issue needs correcting.


A. In early 2019, Honey Crunch changed its estimate from 5% to 4% of receivables on the amount of bad debt expense to be charged to operations. Bad debt expense for 2018, if a 4% rate had been used,  would have been $8,000. The company adjusted Net Income in 2018 to reflect the change.

B. The company changed its method of inventory pricing from FIFO to Average Cost in 2020.  The change was made from 2020 onwards. Just to see the impact, the company also did an analysis of the change for the previous years. 



2019 2020


Net income unadjusted - FIFO basis


$160,000 $215,000


Net income

unadjusted -Average cost basis


165,000 200,000




$(5,000) $15,000


C. (i) In 2020, the company incorrectly understated the ending inventory by $12,000.

(ii) A dispute developed in 2020 with the tax authorities over the deductibility of training expenses. In 2019, the company was not permitted these deductions, but a tax settlement was reached in 2021 that allowed these expenses. As a result of the court's finding, tax expenses in 2019, 2020 and 2021 were reduced by $50,000, $20,000 and $10,000 respectively.

Question 4

The accountant of Holly Limited, a car company, noted the following item in a report to the finance controller on the draft accounts for the year ended December 31, 2021:

  • A motor vehicle originally purchased for $120,000 in 2017 was being depreciated over ten years with an expected scrap value of $20,000. However, due to major complaints and poor road performance earlier this year about the vehicle, it is now expected that the vehicle will only be commercially viable for another year, and it will have no scrap value.


A. Discuss the appropriate accounting treatment for the above.

B. Assuming the books are closed for 2020 and open for 2021, provide the journal entries required to address the change. Ignore income tax effects. Show workings

Reference no: EM133364414

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