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Question Two (14 Marks) Eateries Regina Ltd. (ERL) operates restaurants in several Saskatchewan cities. The accountant...

Question Two

Eateries Regina Ltd. (ERL) operates restaurants in several Saskatchewan cities.

The accountant responsible for ERL’s long lived assets and liabilities has been on medical leave since January 1, 2020. Therefore, the accounting is not up to date and you have been contracted to help with the backlog.

On April 1, 2019, ERL purchased a heavy duty pasta machine for $32,000 for its Regina restaurant. Since wear and tear on the machine is directly related to the number of hours it is used, you have decided to depreciate it using the UNITS OF PRODUCTION method. According to the manufacturer’s website, ERL should be able to use the machine for 20,000 hours before it will require replacement. It has an estimated residual value of $1,000. The machine was used for 2,050 hours during the year ended December 31, 2019. You have been asked to prepare the journal entry (in good form) necessary to recognize depreciation expense. You intend to provide detailed supporting calculations and round all amounts to the nearest cent .

(Please insert response here.)

On July 1, 2015, ERL purchased a commercial espresso maker for its Martensville restaurant at a cost of $14,500. Since that time, the espresso maker has been depreciated using the STRAIGHT LINE method based on a useful life of 20 years and an estimated residual value of $500. On January 1, 2020, the espresso maker had a carrying amount of $11,350. After several breakdowns and before calculating depreciation expense, you have decided to revise the useful life to a total of 15 years and residual value to $750. You plan to calculate the depreciation expense for the year ending December 31, 2020, but you do NOT plan to make the related journal entry at this time. You intend to provide detailed supporting calculations and round all amounts to the nearest dollar .

(Please insert response here.)

On January 1, 2018, ERL purchased a wood fired pizza oven for its Yorkton restaurant at a cost of $19,500. The oven had a useful life of 10 years and an estimated residual value of $4,500. Due to rapidly changing technology, the accountant on leave determined that the oven should be depreciated using the DOUBLE DIMINISHING BALANCE method. On October 1, 2019, ERL closed the Yorkton restaurant and sold the oven for $14,250. You have been asked to calculate the gain or loss arising from the sale of the oven. You have been instructed to clearly label your work including whether a gain or loss has occurred, provide detailed supporting calculations and round all amounts to the nearest dollar or whole percent. You are NOT to prepare any journal entries at this time .

(Please insert response here.)

On December 24, 2019, a customer fell outside ERL’s Saskatoon restaurant. On December 26, ERL was served with a lawsuit claiming $5,000,000 in lost wages and pain and suffering. The restaurant’s general manager was confident that any award would be much less than $5,000,000 until he learned the customer is a virologist and one of the highest paid doctors in Saskatchewan. ERL’s lawyer had commented he did not expect the lawsuit to be successful as staff had been cleared of the sidewalk of snow and ice just prior to the customer’s visit. Also, phone records showed the customer was using her smart phone at the time of the fall. However, on December 31 you were forwarded a video that shows a shovel laying across the sidewalk in the same location the customer fell. The lawyer has now commented that should the video be authenticated, ERL will definitely be required to pay damages. Based on this information, you have been asked to BRIEFLY DISCUSS the CPA Canada Handbook guidance regarding contingent liabilities AND make a DEFINITIVE RECOMMENDATION regarding whether a contingent liability must be recognized on the statement of financial position as at December 31 .

(Please insert response here.)

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