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Question 2 (Total 25 marks) New Orders Ltd (NOL) is a retailer of electronics appliances operating in Hong Kong. During its financial year ended 28

Question 2 (Total 25 marks)

New Orders Ltd (NOL) is a retailer of electronics appliances operating in Hong Kong. During its financial year ended 28 February 2021 (with issue date on 5 March 2021), the following transactions have taken place:

  1. (i) Restructuring plans NOL had announced two major restructuring plans with implementation details.

    The first plan is to reduce its capacity by the closure of two of its retail outlets. This will lead to the redundancy of 20 employees who have all been informed. The costs of this plan are $300,000 in redundancy costs, $200,000 in retraining costs and $50,000 in lease termination costs.

    The second plan is to reorganize the finance and information technology department over a one-year period but this will not implement until two years later. The plan results in 20% of finance staff losing their jobs during the restructuring. The costs of this plan are $225,000 in redundancy costs, $300,000 in retraining costs and $200,000 in lease termination costs. None of the parties affected by the plan are informed.

    Up to 28 February 2021, no journal entries have yet done for both plans.

  2. (ii) Preference shares

    On 1 March 2020, NOL issued 3 million 4% redeemable preference shares of $1 each at par and accounted for as an equity. NOL will redeem the preference shares on 1 March 2025 at $4,408,000. The effective interest rate associated with the preference shares is 8%. On 28 February 2021, NOL paid stated rate preference share dividend for the year to its shareholders.

  3. (iii) Financialguaranteecontract

    On 1 March 2020, NOL issued a financial guarantee contract to Golden Trust Bank (GT) with an obligation to ensure that GT can retrieve interests and redemption value from its debtor of a 3-year loan with face value of $1 million. NOL received a premium of $150,000 from GTs debtor (an unrelated party of NOL) on the same date for its service provided over the 3-year period. As at 28 February 2021, there is a significant increase in credit risk and the lifetime expected credit loss allowance is $108,000. No journal entries have done so far for this contract.

Required

  1. (a) Discuss how each of the above events should account for in the financial statement of NOL for the year ended 28 February 2021 with reference to relevant HKFRSs. (11 marks)

  2. (b) Prepare necessary journal entries (or correction journal entries) of each of these events for NOL for

the year ended 28 February 2021.

(14 marks)

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