Question

Question # 1

You have been hired by Yew Corp. to advise them on how to reflect the events below in their financial statements for the year ended December 31, 2017 under ASPE.

Event 1: The Division A employees union has been negotiating a new contract with Yew Corp. The union is requesting a 5% wage increase retroactive for two years. Yew’s management has offered the union a 2% wage increase retroactive for one year. While the negotiations are still ongoing, the company believes that an agreement will soon be reached for a 4% wage increase retroactive for one year, but there is no guarantee that this will be the outcome of the negotiations.

Event 2: The Division B employees union is also negotiating a new contract with Yew Corp. However, these negotiations are proving to be very tough. So far there has not been much progress and management is pessimistic about a quick resolution. The company is concerned that during 2018 the Division B employees will decide to go on strike; in fact, Yew considers it very likely. At this point it is difficult to assess the economic consequences of the potential strike.

Event 3: Toward the end of 2017, a fire destroyed one of Yew’s plants. The damage is estimated to be $8,000,000 and the company’s insurance policy has maximum coverage of $15,000,000 for this. The deductible on the policy is $300,000. The company is concerned that the insurance premium ($200,000 in 2017) will double in 2018.

Instructions

For each of the above events, state the accounting treatment you believe is most appropriate. Be specific, and give your rationale.

Answer 1

Answer to question

Event 1: The Division A employees union has been negotiating a new contract with Yew Corp. The union is requesting a 5% wage increase retroactive for two years. Yew’s management has offered the union a 2% wage increase retroactive for one year. While the negotiations are still ongoing, the company believes that an agreement will soon be reached for a 4% wage increase retroactive for one year, but there is no guarantee that this will be the outcome of the negotiations.

Ans. As per Accounting standards for private enterprises, here comany would make provision of 2% of wages (4%-2%) as company belive that an agreement will soo be raeched for 4% wages increase retrospective for one yaer. and 1% of increase in wages would jsu disclosure required.

Event 2: The Division B employees union is also negotiating a new contract with Yew Corp. However, these negotiations are proving to be very tough. So far there has not been much progress and management is pessimistic about a quick resolution. The company is concerned that during 2018 the Division B employees will decide to go on strike; in fact, Yew considers it very likely. At this point it is difficult to assess the economic consequences of the potential strike.

Ans. As per Accounting standards for private enterprises, here comany would make just disclosure of probable loss due to strike in financial statement and no need to make provison.

Event 3: Toward the end of 2017, a fire destroyed one of Yew’s plants. The damage is estimated to be $8,000,000 and the company’s insurance policy has maximum coverage of $15,000,000 for this. The deductible on the policy is $300,000. The company is concerned that the insurance premium ($200,000 in 2017) will double in 2018.

Ans. As per Accounting standards for private enterprises, here comany would provide estimated damages of $8,000,000 in profit and loass account or income statement also discosure note that insurance policy has maximum coverage of $15,000,000 and deductible on the policy is $300,000. The company is concerned that the insurance premium ($200,000 in 2017) will double in 2018.