Reference no: EM132954498
Your manager has contacted you with regards to three clients.
He would like you to advice the clients regarding the following issues they have in the preparation of their financial statements. All of the businesses are preparing accounts for the year ended 31 March 2021.
(i) Harriet owns a company, Nails by Harriet Ltd, which operates four nail salons. The company had been extremely successful in the past and the accounts for the year end 31 March 2020 showed a healthy profit.
However, on 23 March 2020 the hair salons were forced to close due to the COVID-19 lock downs and have only been open for 4 months in the year to 31 March 2021.
Apart from the reduced of sales in this period, the company has incurred significant additional costs relating to the purchase of personal protection equipment (PPE), and rearranging the equipment in the salons for social distancing purposes. They also operated at a reduced level for some time as they will not be able to service as many customers as usual. Harriet anticipates that the business will continue to operate at a loss for some time and she is not sure that it is possible to sustain this position long term.
Harriet is unsure as to what needs to be disclosed in the accounts for the year ended 31 March 2021 in respect of this.
(ii) Luke Lee is the finance director of Bonbon Ltd, a client that owns thirty sweet shops in England.
He is in the process of calculating the depreciation charge on non-current assets for the year ended 31 March 2021.
In the past the bicycle shops owned by the company were depreciated on a reducing balance basis at a rate of 4% per year. However, Luke has decided that the charge for depreciation should be the same each year. The economic useful life of a shop is estimated to be 30 years.
Luke is unsure as to whether it is possible to change the depreciation policy of the shop buildings, and if it is allowed, how to account for it.
(iii) Charles Wyke is the managing director of Maguire Ltd, a client that manufactures and sells frozen food.
On 1 February 2021 Maguire Ltd were featured in a national newspaper report which was very critical of the hygiene procedures operated by the company.
In March some of Maguire Ltd's customers started legal action against the company, claiming total damages of £4 million. Charles' legal advisors have told him that the chance of the customers being successful in their claim is about 20%.
On the basis that the legal case will not come to court until 2022, and the chance of the company losing the case is slim, Charles does not think that that there should be any impact on the accounts for the year ended 31 March 2021.
Required:
Problem 1: Explain, with your reasons, how the above items should be treated in the financial statements of your client companies for the year ended 31 March 2021, and what amendments are need to be made to the statements (if any).
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