Tutorial 11

Tutorial 11 Jane Lazar and Huang (4th Edition)Chapter 38-MFRS 137

Question 3 page 773 An entity is involved in a dispute with a competitor, who is alleging that the entity has infringed copyright and is seeking damages of RM15 million. The entity does not want to accrue or disclose the claim for compensation of RM15 million as it believes that disclosure will prejudice the outcome of the litigation. Required: Advise the entity.

Question 4 page 773 Royan recently undertook a sales campaign whereby customers can obtain free gifts by presenting a coupon which has been included in an advertisement in the national newspaper on the purchase of specific electrical household appliances. The offer is valid for a limited time period from 1 January x6 until 31 July x6. Management is unsure as to how to treat this offer in the financial statements statements for the year ended 30 April x6. Required: Advise the management.

Question 5 page 773 Wilder decided to close one of its overseas branches. A board meeting was held on 20 November x4 where a detailed formal plan was presented to the board. The plan was formalised and accepted at that meeting. Meetings were held by management to determine the issues involved in the closure. Subsequently, letters were sent to customers, suppliers and staff on 10 December x4. the estimated cost of restructuring was RM10 million, including staff retraining of RM1 million. The company wished to provide for the restructuring cost in the financial statements for the year ended 31 December x4. The plan was implemented in February x5. Additionally, the operating lease on the present building is non-cancellable and runs for another three years. The annual rental is RM200,000, payable in advance and the lessor has offered to take a single payment of RM450,000 on 1 January x6 to settle the outstanding amount owing and terminate the lease on that date. The lessor has agreed to allow Wilder to sub-let the building at a rental of RM120,000 per year, year, payable in advance on 1 January x5. Required: The company needs advise on how to treat the above under MFRS 137.

Question 6 page 774 Ryan constructed an ecologically-efficient power station at a cost of RM1,000 million and began production on 1 January x4. Its economic life is 20 years. The power station has to be dismantled and the site restored to its original condition at the end of its economic life. Ryan estimated on 31 December x4 that the present value of the dismantling cost will be RM150 million (using a discount rate of 5%). Ninety-five percent of these costs relate to the removal of the power station and five percent relates to damage caused through generating energy. Ryan also purchased an oil company, XY during the year. As part of the sale agreement, oil has to be supplied to the company’s  former holding company at an uneconomic rate for five years. The loss estimated to be sustained over the five years is RM270 million. At the same time, XY is exposed to environmental liabilities arising out of its past obligations mainly due to soil erosion though currently there is no legal obligation to carry out any restoration work. Ryan has a reputation for ensuring the preservation of the environment and has estimated and decided to provide for RM100 million in respect of the environmental liability. Required: Advise the directors on the accounting treatment of the various costs that have been incurred and/or will be incurred.

0.05 x 136m