#need asap ans , please

You have just been appointed financial controller at ABC Company, a manufacturer of specialized

equipment used by various manufacturers of consumer products on their own production lines. Your

immediate supervisor, the vice-president finance, has indicated that he will be retiring in six months and

that you could be in line for his position if you do a good job managing the preparation of the year-end

financial statements. He has provided you with the following comments for your consideration during

the preparation of these statements:

a. The company is currently being sued for breach-of-contract by one of our largest customers. This

case has been ongoing for two years and will likely reach a conclusion next year. Our lawyers have now

estimated that it is likely we will lose, and that the award will probably be in the range of $250,000 to

$300,000. We have disclosed this previously in our notes, but have not accrued anything. Use the same

treatment this year, as the case is not yet completed.

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b. We have changed our inventory costing method this year from weighted-average to FIFO. This has

resulted in an increase in net income of $115,000. The new method should be identified in the

accounting policy note.

c. There are $50,000 worth of customer prepayments included in the Accounts Receivable sub-ledger.

The customers have paid these amounts to guarantee their priority in our production cycle, but no work

has yet been done on their special orders. We will just net these prepayments against the Accounts

Receivable balance and report a single amount on the balance sheet.

d. This year we hired a director of research and development. He has not yet produced any viable

products or processes, but he was a top performer at his previous company. We have capitalized the

cost of his salary and benefits, as we are confident he will soon be producing a breakthrough product for

us.

e. Our bank has put us on warning that our current ratio and debt-to-equity ratio are close to violation

of the covenant conditions in our loan agreement. Violations will likely result in an increase in the

interest rate the bank charges us. Keep this in mind as you prepare the year-end adjustments.

Required: i. Comment on the accounting treatments proposed by the vice-president finance,

supporting your discussion with relevant components from the conceptual framework of accounting.

ii. Discuss the impact of item (e) on your work in preparing the year-end financial statements.