Sunshine Limited, in preparation of its December 31, 2020, financial statements, is attempting to determine the proper accounting treatment for each of the following situations. 1. As a result of uninsured accidents during the year, personal injury suits for $350,000 and $60,000 have been filed against the company. It is the judgement of Sunshine’s legal counsel that an unfavourable outcome is unlikely in the $60,000 case but that an unfavourable verdict approximating $250,000 will probably result in the $350,000 case. 2. Sunshine Limited owns a subsidiary in a foreign country that has a book value of $5,725,000 and an estimated fair value of $9,500,000. The foreign government has communicated to Sunshine its intention to expropriate the assets and business of all foreign investors. On the basis of settlements other firms have received from this same country, it is virtually certain that Sunshine will receive 40% of the fair value of its properties as final settlement. 3. Sunshine’s chemical product division consisting of five plants is uninsurable because of the special risk of injury to employees and losses due to fire and explosion. The year 2020 is considered one of the safest (luckiest) in the division’s history because no loss due to injury or casualty was suffered. Having suffered an average of three casualties a year in the past decade (ranging from $60,000 to $700,000), management is certain that next year the company will probably not be so fortunate. 4. Sunshine operates profitably from a factory that it has leased. During 2020, Sunshine decides to relocate these operations to a new factory. The lease of the old factory continues for the next 5 years. The lease cannot be cancelled and the factory cannot be subleased. Sunshine determines that the cost to settle the old lease is $950,000. 5. Litigation is being pursued for the recovery of $1,300,000 consulting fees on a failed project. The directors believe it is more likely than not that their claim will be successful. Required: Prepare the journal entries in accordance with IAS 37 Provisions, Contingencies and liabilities that should be recorded as of December 31, 2020 to recognize each of the five situations above.
Sunshine Limited, in preparation of its December 31, 2020, financial statements, is attempting to determine the
proper accounting treatment for each of the following situations.
1. As a result of uninsured accidents during the year, personal injury suits for $350,000 and $60,000 have been
filed against the company. It is the judgement of Sunshine’s legal counsel that an unfavourable outcome is
unlikely in the $60,000 case but that an unfavourable verdict approximating $250,000 will probably result in the
$350,000 case.
2. Sunshine Limited owns a subsidiary in a foreign country that has a book value of $5,725,000 and an estimated
fair value of $9,500,000. The foreign government has communicated to Sunshine its intention to expropriate the
assets and business of all foreign investors. On the basis of settlements other firms have received from this same
country, it is virtually certain that Sunshine will receive 40% of the fair value of its properties as final settlement.
3. Sunshine’s chemical product division consisting of five plants is uninsurable because of the special risk of injury
to employees and losses due to fire and explosion. The year 2020 is considered one of the safest (luckiest) in the
division’s history because no loss due to injury or casualty was suffered. Having suffered an average of three
casualties a year in the past decade (ranging from $60,000 to $700,000), management is certain that next year
the company will probably not be so fortunate.
4. Sunshine operates profitably from a factory that it has leased. During 2020, Sunshine decides to relocate these
operations to a new factory. The lease of the old factory continues for the next 5 years. The lease cannot be
cancelled and the factory cannot be subleased. Sunshine determines that the cost to settle the old lease is
$950,000.
5. Litigation is being pursued for the recovery of $1,300,000 consulting fees on a failed project. The directors
believe it is more likely than not that their claim will be successful.
Required:
Prepare the
recorded as of December 31, 2020 to recognize each of the five situations above.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 2 images
