Question

Sleech Ltd operates an information systems company. The firm is preparing its 30 June financial statements, and requires advice concerning the proper treatment of the following situations. Explain how to deal with each situation, and prepare any required jou entries. 1. Sleech Ltd owns a research laboratory which is uninsurable because of the high risk of competitor spying, and poor security systems. Based on previous experience, management firmly believes that a loss of information systems designs will occur during the year. The average loss per year over the last five years has been $500 000. The company self-insures via an appropriation of retained profits. 2. Ms Shazlick, a key manager of the organisation, is currently contracted to receive incentive payments on the basis of share price movements for the firm. During the year, Sleech Ltd has won some key tenders, and the share price has doubled, meaning that Ms Shazlick has earned shares with a market value of $500 000 for the year just ended. 3. The Freight Transport Union has threatened 14-day national strike action unless certain of its wages demands with another company are met. Negotiations have terminated, and it is expected that the union will strike during February the following year. It is estimated that a strike of 10 days would cause losses of earnings of approximately $1 000 000 because of loss of supply and delivery facilities. 4. During the year, Sleech Ltd completed a contract for Danlon Ltd and Dolland Ltd, organisations collaborating in the development of information systems to enable communications in remote cold locations. Sleech Ltd auditors have uncovered what appears to be overcharging on one invoice. Sleech Ltd is of the opinion that its clients will demand a refund of $75 000. 5. The finance minister of a foreign country in which one of its subsidiaries is located, T.G. Cee, has informed Sleech Ltd of her government's intention to expropriate funds from the subsidiary. T.G. Cee indicates that the best outcome Sleech Ltd could expect is to receive 60 per cent of the fair value of the subsidiary's property as settlement. The carrying amount of the (wholly owned) subsidiary is $12 900 000 and the estimated fair value is $15 000 000.

Answer 1

A Contingent liability is to be recorded when :

1. There is a possible obligation depending on whether some uncertain future events occur.

2. A present obligation but payment is not probable.

Based on this following are advisable:
Il Solution : Since the research laboratory is not insured and based on previous experience, management believes that the loss can occur during the year Sleech ltd. should be recording the contingent loss in its books of accounts. - following entry to Retained Profit Dr. $5,00,000 To Provision for loss (r. $500.000 entry to be recorded : t a Since Ms Shazlick due to increase in leech ltd need journal enter in has earned the incentive shore price of the Co., to record the following its books: $5,00,00D Incentive To Shave To paid Expenses Capital in Capital for Cr. Cr. 100,000 B50000 $4,00000 : It par value sdanned with CamScanner is of assumed assumed that the the shares is $100.000.

Since the strike is going to be contined management need to record the provision for the contingent loss of earning. The potential loss is reasonably possible and the likely hood is probable. $ 1.000.000 Retained Prolit To Prof Provision Dr. for loss Cr. $1,000,000 th - Since Sleech Ltd bolioves that is reasonably I possible that the client will as for refund, I it should record the following journal entry. Service $75,000 Retained Proft Dr To Provision for Refund Cr. $75,000 Kanned with amScanner