Question

InternationalClothiersLtd.hasofficesinCanada,Bermuda,EuropeandtheUnitedStates. Eachofthe following events have occurred after the company’s 31 December 2019 year-end, but before their financial statements had been finalized:

1. On January 25, International Clothiers Ltd entered into a long-term lease for a private airplane for the company president and CEO. The lease requires payments of US$75,000 per month for 60 months.

2. One of the company’s major retail customers declared bankruptcy on March 22. The retail customer accounted for 20% of International Clothier’s year-end receivables and 35% of International Clothier’s revenue in 2019.

Required:

Identify and explain the appropriate accounting treatment for the subsequent events described above.

Answer 1

Let's make neccesary calculations and list the transactions to be jornalised. The journal made would narrate the accounting treatment that can be provided for the transactions specified at requirement detail.

1)Given that ,the company had entered into a long term lease with an air line company at a monthly payment of $75,000 for a period of 60 months. With that let's compute the net contractual liability for the company for 5 years or 60 months. The calculation is as under

Total lease period=60 Months

Payment per month=$75,000

Therefore total amount payable for 60 months= $75,000*60

I.e= $$4,500,000

Let's perapare the journal to narrate transaction and describe the accounting treatment.

Airplane lease A/C. Dr.

$4,500,000. To

Airplane Company A/C C.r

$4,500,000

(Being, lease contract liability for 60 month period was brought into A/C)

The journal and narration provides description of accounting treatment to be provided. That is debit the leased property and credit the Lessor.

This based on rule of personal accounts, which is debit the receiver and credit the giver.

The next transaction to follow for the transaction specified above is payment of rent for first month.

Let's prepare the journal

Air plane Rent A/C Dr

$75,000 To

Air plane Rent payable A/C. C.r

$75,000

( Being adjustment entry for the rent payable for the month was brought into A/C)

This is an adjustment entry based on accrual concept.

Air plane Rent payable A/C Dr

$75,000 To

Bank A/C. C.r

$75,000.  

(Being, Rent payable A/C was adjusted with payment to party)

This journal is based on nominal accounting rule of ,that is debit the expenses & losses and credit all incomes& gains.

Airplane Company A/C. Dr

$75,000 To

Airplane lease A/C. C.r

$75,000

(Being liability due to lease contract was adjusted to present value)

This journal represents an adjustment entry made to match or equalize the related accounts to present value of payable A/C.

Now let's look into the second transaction. Given that a customer had declared bankruptcy who constituted 20% of companies year end receivable and 35% of the revenue for the year 2019. Here the revenue part is not considered for accounting treatment because it will already have record at relevant books. Since it is specified that the details belong to year end, that is earned revenue. Loss due to bad bent is considered as it does not bear any record earlier. Let's journalise the transactions with given details,

Bad debt A/C. Dr.

19% of Receivable

To

A/C. Receivable. C.r

19% of Receivable

(Being amount of bad debt was brought into A/C)

The above journal I based of rule of nominal accounting, that Is debit all expenses and losses and credit all income and gain.