Question 5.

Frasier plc is a manufacturing company. The accountant for Frasier plc has encountered a few issues in preparing the financial statements for the year ended 31 March 2021 and would like your advice.

Issue 1

The company expects to pay environmental clean-up costs in relation to one of its factories when it ceases operations on 31 March 2024. The cost is estimated to be 1 million but there is a 20% chance it will be 1.2 million, depending on environmental testing and the degree of pollution to the site. If a provision were created, the relevant discount rate would be 10%.

Issue 2

On 1 April 2020 Frasier plc entered a three-year lease for a new a machine, ownership of which will pass to the company at the end of the lease. The asset has a useful life of four years.

Frasier plc made an initial payment of 20,000 on 1 April 2020 and then three annual payments of 48,000 commencing 31 March 2021. There are initial direct costs of 400 and legal fees of 500. The rate of interest implicit in the lease is 8% and the relevant discount factors are:

Year	DF 8%
1	0.925926
2	0.857339
3	0.793832

Issue 3

Frasier is taking legal action against an engineering company that did faulty work at one of the companys factories. As a result, there was a flood which damaged machinery and the factory had to be closed for one week. The engineering company denies liability, but the directors of Frasier are confident that the claim will be successful.

Required:

1. Issue 1. Analyse the relevant accounting rules and show the entries in the financial statements for the year ended 31 March 2021. [8 marks]

2. Issue 2. Explain the appropriate accounting treatment and show the entries in the financial statements of Frasier plc for each of the three years of the lease under the provisions of IFRS 16. [10marks]

3. Issue 3. Analyse the relevant accounting rules and discuss the appropriate entries in the financial statements. [7 marks]

Total 25 marks