Question

QUESTION 3: LIABILITIES, PROVISIONS AND CONTINGENCIES
(a) Briefly explain the differences between provisions, contingencies and other types of liabilities (e.g. accounts payable).

(b) Raglan Chemicals Inc. is found by the local authority that administers the Resource Management Act, to have been allowing pollutants into the local waterways for a period of 5 years. The pollutants are causing environmental damage and there is the potential for permanent damage should remedial work not be undertaken in the next 1-2 years. The local authority has given the company a choice – cease the polluting activity and remedy the effects of their pollution at their own cost; or be taken to court to ask for a ruling regarding their liability for the damage and any remedial action. Legal costs are expected to reach $250,000 and there is the potential for fines up to $200,000 and the added cost of remedial action (estimates received are for in excess of $500,000) should they be found guilty. The directors acknowledge they are responsible; however, they consider they can avoid liability in court due to a legal technicality.
Explain how you think they should account for this situation:
i. If they decide to remedy the damage and not go to court; and
ii. If they decide to go to court and defend the accusations.

(c) On 1 July 2014, Lord Chew Ltd issued $5 million in five year debentures that pay interest every 6 months at a coupon rate of 8%. At the time of issue, the market required a return of 4% for similar securities. Interest is paid on the last day of December and June.
Required:
i. Determine the issue price.
ii. Complete the amortisation schedule in the yellow answer booklet for the years ending 30 June 2015 and 30 June 2016 only.
iii. Provide the journal entries (narrations are not required) at:
a. 1 July 2014
b. 30 June 2015
c. 30 June 2016

Answer 1

a
Legal responsibility: legal responsibility is anything which the business owes to any outsider. For illustration, a loan from a financial institution
Contingent liability: Contingent legal responsibility is that style of a liability which is non-existent as on date, but it should end up an precise legal responsibility in future. For example, if a purchaser has filed a swimsuit against the company for some compensation. It will grow to be an exact legal responsibility in future if the organization loses the case. Nonetheless, as on date, it isn't a legal responsibility as the effect shouldn't be known in these days
Provision on the other hand is atmosphere apart part of profit to fulfill an rate/loss which is kind of particular to happen in future. For instance, provision for bad money owed. Situated to your prior industry experience, you recognize roughly 0.1% of your enterprise receivables usually are not going to be paid back to you. In different phrases out of whole quantity receivable from debtors, zero.1% goes to emerge as dangerous debt (irrecoverable debt). So on this case you possibly can put aside part of your current years profit to fulfill this loss more likely to occur next 12 months. In other phrases, you might create a provision for dangerous money owed.