Reference no: EM132750895

Urban plc, a company that prepares its financial statements to 31December each year, is involved in the construction and repair of city centre student accommodation. Before the financial statements for the year ended 31 December 2018 can be finalised, a number of outstanding issues need to be resolved.

Issue 1:

In early January 2019, a customer commenced legal action against Urban plc alleging that construction work completed in September 2018 had not been carried out in accordance with the terms of the contract. The directors of Urban plc intend to defend the allegations vigorously and Urban plc's legal advisors estimate that the company has an 75% chance of successfully defending the claim. If the customer is successful, penalties and legal fees are expected to amount to £1,500,000. If Urban plc wins the case, non-recoverable legal fees of £65,000 will have been incurred. The directors of Urban plc are proposing to omit reference to the legal action in the financial statements for the year ended 31December 2018 as the writ was not issued until January 2019.

Issue 2:

Urban plc was informed on 6 January 2019 that one of its major customers, Unibed Limited, had gone into liquidation. The liquidator indicated that no payments would be made to unsecured creditors. The amount owed by Unibed Limited to Urban plc on 6 January 2019 amounted to £100,000, of which £60,000 related to work completed on 21 December 2018 and £40,000 to work commenced and completed during the first week of January 2019.

Issue 3:

During 2018, there was unrest amongst Urban plc's construction workers following changes to their terms and conditions of employment, with the directors of Urban plc seeking to make 20% of the workforce redundant. On 6 January 2019, following protracted negotiations, it was agreed that 12% of the workforce would be made redundant at a cost of £400,000.

Issue 4:

As the profits of Urban plc for the year ended 31 December 2018 exceeded expectations, the directors wish to reward the ordinary shareholders for their commitment to the company. At a meeting of the Board of Directors on 5 January 2019 it was decided that a dividend of £500,000 be paid immediately to the ordinary shareholders and accounted for in the financial statements for the year ended 31 December 2018.

Issue 5:

During 2018, Urban plc purchased freehold land that is currently stated at its cost of £1,000,000 in the financial statements for the year ended 31 December 2018. The directors do not wish to depreciate the land in 2018 but are willing to do so in future years.

Requirement

Problem 1: You must prepare a memorandum to the directors of Urban plc which explains the accounting implications of each of the above issues, showing clearly any accounting adjustments required.