Question

1

As the accountant for G. Scott Company, how would you report the following debt obligations on the company’s statement of financial position on December 31, 2018?

a) The company has a debt obligation that matures on December 31, 2022. The debt is callable by the lender at any time. (1 mark)

b) G. Scott has a long term obligation of $1,000,000 which is maturing over 5 years in the amount of $200,000 per year. The obligation is dated November 1, 2018 and the first maturity date is November 1, 2019. (1 mark)

2

The Environmental Protection Agency on August 1, 2018, identified Rizden Pesticides Ltd. has being potentially responsible for damages to the environment. The company’s management and counsel have concluded that it is probable that Rizden will be responsible for damages in a reasonably estimated amount of $20,000,000. Rizden has an insurance policy of $30,000,000 with a deductible clause of $400,000. As the company’s accountant, how would you report this information in its financial statements at December 31, 2018? (2 marks)

3

On October 1, 2018, Slipper's Corporation borrowed $50,000 by signing a note valued at $50,000 with an interest rate of 7%, which matures in 9 months. Prepare the following entries for the company:

1. October 1, 2018 entry. (1 marks)

ii) December 31, 2018, annual adjusting entry. (2 marks)

iii)July 1, 2019 entry. (3 marks)

        

Answer 1

Answer to Q#1 (First question in the list Part Statement Answer (Debt obligation) The company has a debt obligation that matures on Dec. 31, 2022 The debt isalable by the lender at any time. a) Current liability b) G.Scott has a long term obligation of $1,000,000 which is maturing $200,000 is current liability (Current maturity of long-term debt) over 5 years in the amount of $200,000 per year. The obligation is dated November 1, 2018 and the first maturity date is Nov. 1, 2019. Balance $800,000 is long-term liability For Part-(a): It is given that the debt is callable by the lender at any time. Therefore, firm's working capital shall be maintained sufficiently all time to discharge this debt obligation whenever the lender demands it. Hence, it must be reported as a current liability as at Dec. 31, 2018. For Part-(b): It is given that the long term obligation of $1,000,000 which is maturing over 5 years in the amount of $200,000 per year. It means that out of total long-term obligation $1 million, $200,000 matures in the immediately succeeding year resulting $200,000 to be reported as a current liability (current maturity of long term debt) and the balance of $800,000 shall be reported as long-term liability as at Dec. 31, 2018.