Reference no: EM132389622 , Length: 2 pages
ASSIGNMENT
The Chief Accountant of Paul Paul Ltd was involved in an accident a few weeks before finalising the accounts for the company for the year ended 31/12/2016. The Assistant Accountant Rugube, who has just graduated from A.U has been asked by the board to finalise the accounts. The net profit before taking into account the issues mentioned below was $3 400 000. The tax rate is 40%. There are no timing differences in the above profit.
Additional Information
a). The company offers a three year 3 year warranty on all goods manufacture by the company. Cost of goods produced in the last three years were as follows:
Year ending 31/12/2012 $ 4 900 000
31/12/2013 $ 7 200 000
31/12/2017 $14 500 000
Generally a provision of 2% of cost of goods is made annually. The generally pattern of claims are:
1st Year 10%
2nd Year 30%
3rd Year 60%
b). Over the years the company has contaminated the environment. In one country where it operates, a draft law has been enacted. It requires the company to clean up the environment. A team of experts has put the cost of such action at $400 000.
c). In another country, the company manufactures cement. The environment round its factory has been grossly contaminated. About 100 households have demanded to be relocated. No legislation has been oriented in the country concerning the environment but the company has widely published notices stating that it is environmentally conscious in all countries that it operates. In the past, the company performed to public expectations. The cost of cleaning up the environment and relocating affected households would come to $2 400 000.
d). During the financial year, the company set up a quarry to service its cement business. The law in that country requires that at the end of its life, the quarry should be levelled up and tree planted. The estimated cost of the activity is $400 000. The company has a life of 10 years.
e). In another country the directors has decided to close one division. The costs related to the closure amount to $450 000. No communication to the people affected has been made.
f). In the same country in (e) above, a decision has been made to close down one division at an estimated all inclusive cost of $670 000. Affected employees has already been notified.
g). A new law was passed on 1/ June 2014 requiring that all companies should be members of the government's National Social Security Fund. Failure to do so by December 2014 would attract penalties of $30 000. At the Statement of Financial Position date, the company had not complied with the legislation.
h) Another law was passed making it an offence for companies to operate boiler steam with a chimney of less than 9m in height. All companies were given until 30 June 2014 to comply. At the Statement of Financial position date the company had not complied. The company has 10 steam boilers all with an average height of 3.8m. the defaulters are required to pay $15 000 per steam boiler. The cost of modifying the steam boilers' chimney is estimated at $40 000 per boiler and this could be capitalised.
i). Five families are suing the company for the death of their relatives caused by the company's driver. The company disputes the claim and its attorney advise that their chance of winning are slim. The plaintiffs are claiming $5 000 000 in total.
j). A class action against the company has been instituted by employees of the company. They claim that the dust in the factories made them suffer from TB. A total of $6 000 000 is being claimed. The company's attorney advise the company that the case could go either way. Total legal cost payable should the company lose, amount to $8 200 000.
k). The company was leasing a machine from Kacook Ltd at a cost of $40 000 per year. At 31/12/2014, the company decided to cancel the lease agreement which still had 3 years to run. The lease does not provide for cancellation.
The Assistant Accountant has approached you for help on how to deal with the each of the above issues. To assist him you are required to:
a). For each of the above items, state whether there is an obligation or not, type of obligation if any, and how they should be treated in the accounts.
b). Redraft the financial statements of the company in line with generally accepted accounting practice. The company has a huge tax carry over and hence it has no current tax liability.