Queensland Enterprise Manufacturers (QEM) makes microwave ovens. The company has historically been very profitable; however, in the last year and a half, things have taken a turn for the worse due to higher consumer interest rates and a slowdown in the economy. On its 2023draft year-end statements, the company is currently showing a break-even position before any final yearend adjustments. The company fired its CEO, Thomas Cook, at the beginning of 2024 and a turnaround specialist was hired-Sandra Wood. Sandra has a reputation of being able to come into companies that are suffering and make them profitable within two years. Sandra has agreed with QEM's board of directors that she will be paid a \$1-million bonus if the company has a combined two-year profit of $5 million by the end of 2025 . Sandra also has to make sure that the company's debt to equity ratio will not be worsened as the bank has warned QEM that their current debt to equity ratio is marginal. Among other things, Sandra instituted a more aggressive sales policy for QEM's customers, who are mainly retailers, as well as a new remuneration policy for sales staff. Sandra attributed the company's poor performance to untrained sales staff whose remuneration and bonus scheme was not properly aligned to maximize sales. Under the new remuneration policy, sales staff is paid salary as well as a bonus, which is a percent of gross sales as at year end. The sales staff has responded well and sales have increased by 20%. The new sales policy is as follows: - Cash down payment of 20% with remaining payment for shipment once the ovens are sold by the customer to a third party. - If the customers double their normal order, no down payment is required. - The ovens may be stored on the premises of QEM. Many customers have taken the company up on this offer in order to double the size of their purchase. - Any unsold ovens are allowed to be returned after year end. Under the new policy, sales have increased dramatically, with many customers taking advantage of the new terms. As at year end, legal title to all ovens has passed to the customers. Only customers with excellent credit history have been allowed to purchase under the new policy. The company has accrued bonuses for almost all its sales staff. The increased profits from these sales have been offset by the accrual of $500,000 of Sandra's bonus. She is very confident that she will be able to turn the company around and so has accrued part of her bonus. She has also decided to change several accounting policies, including the following: Depreciation on machinery switched to straight-line from double-declining-balance. Note that the equipment is about 2 years old with an estimated life of 10 years. Sandra felt that the double-declining-balance method was arbitrary and noted that several of their competitors used the straight-line method. Machinery is most useful when new since it requires less downtime for fixing. Another problem that Sandra had identified was in inventory management. Sandra was convinced that inventory was being stolen and/or "lost" due to poor tracking. QEM had therefore hired a company, Software Limited, to install a new inventory tracking system during the year. Midway through the year, Software Limited had gone bankrupt and was not able to finish the installation. The installation was a customized job and as at year end, the system was not functioning yet. QEM has not been able to find a company to replace Software Limited. To date, $2 million has been spent on the new system. Sandra had capitalized the costs and noted she was confident that she would be able to find a company that could successfully complete the installation. The machinery that makes the microwave oven has been in use for 20 years and is due for replacement. QEM has the option of buying the machine or leasing it. Currently, QEM is leaning toward leasing the machine since it is expensive to buy and funds would have to be borrowed from the bank. After much negotiation with the leasing company, the following terms were agreed upon and written into the lease agreement. - Porter Limited would manufacture and lease to QEM a unique machine for making the barbeque equipment. - The lease would be for a period of 12 years. - The lease payments of $150,000 would be paid at the end of each year. - QEM would have the option to purchase the machine for $850,000 at the end of the lease term, which is equal to the expected fair market value at that time; otherwise, the machine would be returned to the lessor. - QEM also has the option to lease the machine for another eight years at $150,000 per year. - The rate that is implicit in the lease is 9%. The new machine is expected to last 20 years. Since it is a unique machine, The lessor has no other use for it if QEM does not either purchase it at the end of the lease or renew the lease. If QEM had purchased the asset, it would have cost $1.9 million. Although it was purposefully omitted from the written lease agreement, there was an understanding that QEM would either renew the lease or exercise the purchase option. QEM has a policy of refunding purchases by dissatisfied customers, as long as it is within two years from the date of purchase. This refund policy is not documented, but QEM has made a practice of doing so in the past. During the year, QEM's sales totalled $35 million. From experience, the company has determined the following probabilities for returns: there is a 25% probability that returns will represent 6% of total sales, 55% probability that they will represent 4% of total sales, and 20% probability that they will represent 2% of total sales. During the year, there were returns on current year's sales of $1.1 million, on which refunds were made. QEM is being sued by a former employee. The non-manager employee contends that not enough severance was paid when he was let go in June 2024. The ex-employee's lawyers are asking for a severance payment of two weeks' pay for each year worked, which in this case was 25 years. QEM agreed to pay the employee severance of $30,000 when he was asked to leave the company. This $30,000 has already been accrued in the accounting records. The case is still being disputed and will go to arbitration early in March 2025. QEM's lawyers believe that the probabilities of Required: Adopt the role of the company's auditors and discuss the financial reporting issues for the 2024 year end. The company is a private company but would like the statements to be prepared in accordance with IFRS. If applicable, include the journal entries to explain the accounting implication