In Year 1, Wellbeing Ltd began to receive complaints from physicians that patients were experiencing unexpected side effects from the company’s healthy drink. The company took the drink off the market near the end of Year 1. During Year 2, the company was sued by 1,000 customers who had had a severe allergic reaction to the company’s drink and required hospitalisation. At the end of Year 2, the company’s lawyers estimated a 60% chance the company would need to make payments of £3000 to settle each claim. At the end of Year 3, while none of the cases had been resolved, the company’s lawyers now estimated that the company would have to pay £4500 to settle each claim. In Year 4, 400 claims were settled at a total cost of £1.2 million. Based on the experience, the company believes that the remaining cases will be settled for £5,400 each. Required: Advise on the accounting treatments for Year 1 – 4 related to this litigation.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
a.) In Year 1, Wellbeing Ltd began to receive complaints from physicians that patients were experiencing unexpected side effects from the company’s healthy drink. The company took the drink off the market near the end of Year 1. During Year 2, the company was sued by 1,000 customers who had had a severe allergic reaction to the company’s drink and required hospitalisation. At the end of Year 2, the company’s lawyers estimated a 60% chance the company would need to make payments of £3000 to settle each claim. At the end of Year 3, while none of the cases had been resolved, the company’s lawyers now estimated that the company would have to pay £4500 to settle each claim. In Year 4, 400 claims were settled at a total cost of £1.2 million. Based on the experience, the company believes that the remaining cases will be settled for £5,400 each. Required: Advise on the accounting treatments for Year 1 – 4 related to this litigation.
b) The board of directors of Coco Plc approved a restructuring plan on November 1, Year 1. On December 1, Year 1, Coco publicly announced its plan to close a manufacturing division in Birmingham and move it to China and the company’s Birmingham employees were notified that their jobs would be eliminated. Also, on December 1, Year 1, to ensure an orderly transition, management promised a termination bonus of £10,000 to any employees who remains with the company until his or her position is terminated in the fourth quarter of Year 2. The company also agreed to pay termination bonuses to 120 employees at the end of Year 2, for a total of £1.2 millions. The present value of the termination bonus is £1 million. Required: Determine (with explanation) the provision that should be recognised for Coco Plc.’s restructuring plan. Identify the dates on which
c) On June 1, Year 1, Tomtom Ltd. entered into a contract with Office Rent Ltd to rent an office space in London on January 30, Year 2, at a price of £4000 per month for 12 months. The office will be used for the marketing team. On December 1, Year 1, Tomtom realised 80% of its staff were happily working from home. As a result, the company believes it no longer has a need for a physical office space. However, it is not allowed to rent out to a third party. The contract is cancellable with a cancellation fee of £20,000. Required: Advise on the accounting treatments related to the contract, if any, Tomtom Ltd. should make on December 31, Year 1.
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