Question

1. On July 1, 2019 IT Corp acquired a machinery worth Php 2,500,000 from DIKO Co. Term of the contract calls for a downpayment of Php 500,000 and signing a 2 year 10% note payable for the balance. Interest is payable quarterly. The existing loan agreement does not carry a provision to refinance. During September, IT Corp was experiencing financial difficulty due to COVID-19 and was unable to pay the periodic Interest. a. What amount of current liability should IT Corp report in its December 31, 2019 balance sheet assuming DIKO Co. agreed at balance sheet date not to demand payment as a consequence of the breach? b. What amount of current liability should IT Corp report in its December 31, 2019 balance sheet assuming DIKO Co. agreed to provide a grace period ending at least twelve months to rectify the breach? 2. A truck owned and operated by BASICzxc Company was involved in an accident with an auto driven by Julian on January 12, 2019. BASICZxc Company received notice on April 24 2019 of a lawsuit for Php 800,000 damages for a personal injury suffered by Julian. BASICZXC
2. A truck owned and operated by BASICzxc Company was involved in an accident with an auto driven by Julian on January 12, 2019. BASICzxc Company received notice on April 24, 2019 of a lawsuit for Php 800,000 damages for a personal injury suffered by Julian. BASICzxc Company counsel believes it is reasonably possible that Julian will be successful against the company for an estimated amount in the range between Php 100,000 and Php 400,000. No amount within this range is a better estimate of potential damages than any other amount. It is expected that the lawsuit will be adjudicated in the latter part of 2020. What amount of loss should BASICzxc Company accrue at December 31, 2019?

Answer 1

1)(a)

Purchase Price of the Machine = $2500000

Less: Down Payment = $ 500000

10% Notes Payble $2000000

Note: 10% Notes Payble is to be shown under the Non-Current liabilities.

Interest to be accrued quarterly on 10% Notes Payble = $2000000 x 10/100 x 3/12 = $50000.

During the year the company has failed to pay interest of two quarters i.e from jul 2019 - sep,2019 and from oct,2019 - dec,2019 on 10% Notes payble.

So, the interest of the 2 quarters which is $(50000x2) = $ 100000 must have to be shown under the current liabilities as Outstanding Interest.

(b) As per the accrual basis of accounting a current liability must have to account for if any expense is accrued but not paid wheather or not any grace has been allowed by the creditor to the company. Moreover as per the periodicity concept a current liability must have to be recorded as and when interest is accrued during the period.

So, the amount of current liabilty will be $100000 for the unpaid interest. It is immeterial that DIKO Co. has given a grace period.

2) The compensation against the company is a contingent liability and as the probablity is high for the lose of the company and the amount is reasonably certain then the company has to record the loss. Also, as per the concept of coservatism a probable loss must have to be accounted for. The amount of loss is estimated between PHP100000 to PHP400000. So, the loss to be recorded is PHP 400000 as per the concept of conservatism. If the compensation comes lower in the court desicion than PHP 400000 then the profit has to credit in the Income Statement and if it comes grater than the loss account for by the company then furthar loss must have to be recognised by the company.