Question

The directors of Elite Ltd are due to consider the authorization of the company’s financial statements for issue for the year ended 31 December 2017 and the following events are revealed. As you are the financial controller of Elite Ltd, discuss how you would account for the following items in accordance with HKAS 37 Provisions, Contingent Liabilities and Contingent Assets. Justify your answers

a Bills receivable of $2 million were discounted during the year and are due for maturity on 15 February 2017. The bill is discounted with recourse, that is, Elite Ltd has to repay the amount to the bank if the bill is unpaid by the customer on the maturity date.

b A former employee, who was dismissed from the company’s service, has lodged a claim of $500,000 against the company for unfair dismissal. The company’s legal advisers do not think he will succeed in any claim, and have been negotiating with the former employee who has reduced his claim to $300,000. A provision of $200,000 has been made.

c Elite Ltd has guaranteed the bank overdraft of one of the directors of Elite Ltd to the extent of $10 million as at 31 December 2017.

Answer 1

A bill of exchange is an instrument in writing, an unconditional order signed by the maker directing to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument. The bill is written by the seller (creditor), called payee, to the purchaser (debtor), called drawee. Also, the drawee has to write the word ‘Accepted’ on the bill and sign under it. Only then it legally binds him to pay his debt. Without the drawee accepting the bill, it would be useless. The bill may also be prepared by somebody else than payee i.e. the drawer may be different from payee. The bills can be transferred from one to another; the payee can endorse it to another person on the back of bill under his signature. The person endorsing it, is called endorser and the person to whom it is endorsed, is called endorsee.

There is discounting facility available. If the payee needs cash before due date, he can take the bill to a bank which will discount the bill and give him a cash amount equal to value of the bill minus the discount.

A---a)What happens when a bill is not honored by the acceptor on the due date (cash is not paid to the holder of the bill)? A bill of exchange is said to be dishonored when its acceptor refuses to pay the amount of the bill to the holder of the bill on its maturity. The bill then becomes useless and the party from whom it has been received will be liable to pay for the amount. It is very important to know that, when a bill is dishonored, in whose possession it was? Because when a bill is dishonored

B)--When a bill is dishonored, the holder of the bill, (drawer, banker, endorsee or any other party) in order to make a strong ground for drawing legal proceeding against the acceptor may get the official recognition that the bill has been dishonored. He goes to an official called notary public, and gives the bill to him. The notary public will present the bill for payment again to the acceptor and if the money is received he will hand over the money to the original party. But if the bill is again dishonored, the notary public will note the fact of dishonor and the reasons of the dishonor on the bill and will give the bill back to the holder of the bill.

B-- in thia situation company should made a provision of $500000 insted of $200000 because it is contingent lib and made 100% provision.