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Dream Limited prepares its financial statements to 31 December each year, and the following issues need to be resolved before the financial statements for the
Dream Limited prepares its financial statements to 31 December each year, and the following issues need to be resolved before the financial statements for the year ended 31 December 2020 can be finalised: Issue 1: On 1 January 2020, Dream Limited commenced selling a guitar for 2,000 which includes an extended warranty that covers all repairs for a period of three years. A competitor sells the same guitar without a warranty for 1,800 and a specialist insurance company sells a warranty similar to Dream Limited's for 300. During the year ended 31 December 2020, Dream Limited sold 2,700 guitars with the extended warranty. Requirement Prepare the relevant extracts for the financial statements of Dream Limited for the year ended 31 December 2020 assuming that claims under the warranty are expected to occur evenly over the three-year warranty period and that sales occurred evenly throughout 2020. 10 Marks Issue 2: Dream Limited was informed on 7 January 2021 that one of its major customers, Fret Limited, had gone into liquidation. The liquidator indicated that no payments would be made to unsecured creditors. The amount owed by Fret Limited to Dream Limited on 7 January 2021 amounted to 185,000, of which 110,000 related to work completed on 23 December 2020 and 75,000 to work commenced and completed during the first week of January 2021. Requirement Explain clearly how the above issue should be accounted for in the financial statements of Dream Limited for the year ended 31 December 2020, showing any adjustments required. 6 Marks Issue 3: During the year ended 31 December 2020, Dream Limited purchased three identical properties: C, D and E. Further information with respect to each of the properties is provided below: Property C is currently vacant, with the intention being to lease this property under an operating lease to an unconnected third party; Property D is let to, and occupied by, a company unconnected to Dream Limited; and Property E is used by Dream Limited as one of its retail outlets. Requirement Explain clearly how each of the three properties should be accounted for in the financial statements of Dream Limited for the year ended 31 December 2020
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