On 1 January, Laja Bhd owes the Arbor Bank Bhd RM350,000 which is due on December 31. Since Laja seems unable to repay the note, the bank agreed that Laja can "settle" this balance by agreeing to make four, annual installments on each of the next four years, provided that it adds a "Note Payable is repayable on demand" clause to the note. Specifically, the lender will "do its best" not to call the note "provided that no adverse significant shift in operations occurs." However, Arbor Bank Bhd has the sole discretion to ascertain if these adverse conditions arose, and then to call the note due immediately. REQUIRED: (a) Explain how should Laja Bhd present the liability in the statement of financial position? (b) Assume Laja Bhd does not agree to the "Notes Payable is repayable on demand", explain the accounting treatment for the liability with the withdrawal of the clause.

On 1 January, Laja Bhd owes the Arbor Bank Bhd RM350,000 which is due on December 31. Since Laja seems unable to repay the note, the bank agreed that Laja can "settle" this balance by agreeing to make four, annual installments on each of the next four years, provided that it adds a "Note Payable is repayable on demand" clause to the note. Specifically, the lender will "do its best" not to call the note "provided that no adverse significant shift in operations occurs." However, Arbor Bank Bhd has the sole discretion to ascertain if these adverse conditions arose, and then to call the note due immediately. REQUIRED: (a) Explain how should Laja Bhd present the liability in the statement of financial position? (b) Assume Laja Bhd does not agree to the "Notes Payable is repayable on demand", explain the accounting treatment for the liability with the withdrawal of the clause.

Financial Accounting

14th Edition

ISBN:9781305088436

Author:Carl Warren, Jim Reeve, Jonathan Duchac

Publisher:Carl Warren, Jim Reeve, Jonathan Duchac

Chapter14: Long-term Liabilities: Bonds And Notes

Section: Chapter Questions

Problem 11E

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