Part 1 (19 marks) Over a 5-year period, Major Parts Ltd completed the following transactions affecting Non-Curren assets in its financial years ending 30 June. The company uses straight-line depreciation on al depreciable assets and records depreciation to the nearest month. Required: Prepare journal entries to record all the transactions of Major Parts Ltd. Entries may be rounded to the nearest whole dollar. (19 marks) Part 2 (6 marks) On 1 July 2019, COVID Supplies Ltd borrowed $30 million to finance an investment in a laboratory for developing and testing surgical supplies. The loan is due on 30 June 2029. The lender insisted on a debt covenant to the loan agreement, specifying that the ratio of total liabilities to total tangible assets not exceed 65%. Covid Supplies Ltd met with the requirement in 2020 when the ratio of total liabilities to total tangible assets was 64%. Covid Supplies Ltd also invested in plant and equipment used exclusively to manufacture latex gloves. However, due to a decline in demand for latex gloves, analysts are predicting that the company may need to write-down some of its plant and equipment. Required: Debt covenants or restrictions are commonly used in Australian lending agreements. (a) Explain why management would choose to enter into a lending agreement that contains a covenant that restricts the leverage of the company. (2 marks) (b) If a company is close to breaching its leverage covenant what actions might it take? (Refer to Agency theory in your answer). (4 marks) Part 1 (19 marks) Over a 5-year period, Major Parts Ltd completed the following transactions affecting Non-Curren assets in its financial years ending 30 June. The company uses straight-line depreciation on al depreciable assets and records depreciation to the nearest month. Required: Prepare journal entries to record all the transactions of Major Parts Ltd. Entries may be rounded to the nearest whole dollar. (19 marks) Part 2 (6 marks) On 1 July 2019, COVID Supplies Ltd borrowed $30 million to finance an investment in a laboratory for developing and testing surgical supplies. The loan is due on 30 June 2029. The lender insisted on a debt covenant to the loan agreement, specifying that the ratio of total liabilities to total tangible assets not exceed 65%. Covid Supplies Ltd met with the requirement in 2020 when the ratio of total liabilities to total tangible assets was 64%. Covid Supplies Ltd also invested in plant and equipment used exclusively to manufacture latex gloves. However, due to a decline in demand for latex gloves, analysts are predicting that the company may need to write-down some of its plant and equipment. Required: Debt covenants or restrictions are commonly used in Australian lending agreements. (a) Explain why management would choose to enter into a lending agreement that contains a covenant that restricts the leverage of the company. (2 marks) (b) If a company is close to breaching its leverage covenant what actions might it take? (Refer to Agency theory in your answer). (4 marks)
