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

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Concept explainers

Cost of Credit

The cost of credit is an extra amount that the borrower has to pay besides the loan amount. These credit charges may vary from loan to loan. The cost of credit includes interest charges, maintenance charges, and arrangement charges. Some of the costs are mandatorily collected by the lender based on the loan amount and tenure of the loan. The cost of credit is also called finance charges of the credit.

Question

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.
C.
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.

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