QUESTION:

Explain, with your reasons, how the above items should be treated in the financial statements of your client companies for the year ended 31 March 2020, and what amendments are need to be made to the statements

3. Your manager has contacted you with regards to three clients.

He would like you to advice the clients regarding the following issues they have in the preparation of their financial statements. All of the businesses are preparing accounts for the year ended 31 March 2020.

1. (i) Janet Barber owns a company, Barbers R Us Ltd, which operates four hair salons. The company has been extremely successful in the past and the draft accounts for the year end 31 March 2020 have been produced showing a healthy profit.

   However, on 23 March 2020 the hair salons were forced to close due to the COVID-19 lock down in the UK and have not been able to reopen until 4 July 2020.

   Apart from the complete lack of sales in this period, the company has recently incurred significant additional costs relating to the purchase of personal protection equipment (PPE), and rearranging the equipment in the salons for social distancing purposes. They will also operate at a reduced level for some time as they will not be able to service as many customers as usual. Janet anticipates that they will operating at a loss for some time and she is not sure that it is possible to sustain this position long term.

   Janet is unsure as to whether the accounts for the year ended 31 March 2020 should be adjusted for the impact of COVID-19, and what information should be included in the financial statements for the year ended 31 March 2020.

2. (ii) Holly Schofield is the finance director of Great Mountain Biking (GMB) Ltd, a client that owns ten bicycle shops in England.

   She is in the process of calculating the depreciation charge on non-current assets for the year ended 31 March 2020.

   In the past the bicycle shops owned by the company were depreciated on a straight line basis based on cost over 20 years. However, Holly has decided that the economic useful life is more likely to be 15 years.

   Holly is unsure as to whether it is possible to change the depreciation policy of the shop buildings, and if it is allowed, how to account for it.

3. (iii) Neil Rushton is the managing director of Rushton Ltd, a client that manufactures and sells cosmetic beauty products.

   On 1 February 2020 Rushton Ltd were featured in a national newspaper report which was very critical of one of their beauty products, claiming that it caused skin rashes and on certain sensitive skin could cause significant damage to the skin.

   In March some of Rushton Ltds a group of customers started legal action against the company, claiming total damages of 6 million. Neils legal advisors have told him that the chance of the customers being successful in their claim is about 20%.

   On the basis that the legal case will not come to court until the end of 2020, and the chance of the company losing the case is slim, Neil does not think that that there should be any impact on the accounts for the year ended 31 March 2020.

Required:

Explain, with your reasons, how the above items should be treated in the financial statements of your client companies for the year ended 31 March 2020, and what

amendments are need to be made to the statements (if any).

Total: 18 marks