Question 4 (15 marks)

Solidarity Ltd (referred herein "the company") is in the midst of preparing the annual report for its latest financial year ended 31 December 2019.

The financial statements have been approved and authorized for issue on 15 April 2020 but the date of the Annual General Meeting has not been finalized in the midst of the COVID-19 pandemic, pending for further guidance and announcement from the relevant authorities on the conduct of General Meetings during the Safe Management Period.

Explain whether or not you agree with the accounting treatment adopted for each of the following items pertaining to the financial statements which were brought to your attention:

a)The company discounted all its bills receivables with recourse to a factoring company on 10 December 2019 in view of projected working capital needs for the year 2020.

This item was not recognized in the financial statements but disclosed in the Notes to the Financial Statement under the caption "Subsequent Events".

(5 marks)

b)The company was sued for breach of copyright by a market competitor for a product sold in 2019. As at balance sheet date on 31 December 2019, the company's lawyers advised that there is 60% probability of paying $1 million damages, 30% probability of paying $500,000 damages and 10% probability of not incurring any litigation loss.

The court case was heard on 3 May 2020 and judgement was passed requiring the company to pay the market competitor $900,000.

A provision of $1 million was made for possible damages payable in the accounts on 31 December 2019.

(6 marks)

c)A debtor who owed $1 million (arising from a sale in early April 2019) as at 31 December 2019 became bankrupt in March 2020.

No provision was made in the accounts on grounds that the debtor's financial demise was a result of the business being badly hit by COVID-19.

The company planned to write off the debt in the accounts for the year ended 31 December 2020.

(4 marks)