Longhorn Gate Limited (LGL) Bonds Trading Assignment

Longhorn Gate Limited (LGL) Bonds Trading Assignment

Instructions/Descriptions

Longhorn Gate Limited (LGL) Bonds Trading Assignment

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Question Description

Longhorn Gate Limited (LGL), a privately held, December 31 year end, company with bonds trading publicly on the open market, has the following independent situations. Reply to the required of each situation. The following matters pertain to the financial year ended December 31, 2020.

[Round all calculations to the nearest dollar; no cents]

Situation #1

LGL has bonds payable that are due in 2021 for $5,000,000. This amount is being reported as a current liability in the company’s preliminary classified balance sheet at December 31, 2020. On December 15, 2020, management entered into an agreement with the bondholders to refinance into a long-term secured loan, ¾ of the $5,000,000 upon falling due in 2021. LGL expects to settle the remaining amount when the bonds mature, from current working capital.

Required: How should the bonds be reported on the finalized classified balance sheet as at December 31, 2020? Why?

Situation #2:

LGL acquired and installed a tank farm on the site of its main manufacturing facility to purify brown water created by its manufacturing processes. This is in compliance with BC environmental regulations. The tank farm became fully operational on January 1, 2020 and will have an expected useful life of 20 years. LGL’s depreciation is straight line basis over an asset estimated useful life.

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The following data is provided relative to the tank farm installation.

The prime contractor’s base price, excluding taxes, for the

installation of an integrated 8 tank water purification system

including land excavation, foundations, electrical and safety

devices, invoice rendered January 3, 2020…………$6,750,000 +GST+PST

Early payment incentive; cash discount, net 10, EOM………………     1.5%

LGL applies a discount lost account, as appropriate.

Tax rates, no exemptions or relief ………………………….………..GST:5%; PST:7%

Insurance premiums during installation, not covered

by the contract………………………………………………………………$25,000 +GST only

Storage costs for tanks during installation caused by LGL

not having access routes ready for which it was

responsible……………………………………………………………………….$8,000 + GST only

No significant recoverable costs are estimated at the end of the tank farm’s estimated useful life.

LGL will be required to restore the site of the tank farm to environmental standards at the end of its useful life. Based on current regulatory requirements and technologies, the estimated future cost to restore at the end of the farm’s useful life is $1,000,000.

Of this $1,000,000, 25% is attributable to the normal deterioration of the tank farm if it were rendered idle and 75% of the future cost would be caused by the annual and even environmental degradation caused through normal operation wear and tear.

The appropriate discount rate applied is 3%

Required #2-1:

Calculate (show calculations) the total value to be assigned to the capital asset, Tank Farm when it became operational in early January, 2020. Accounting entries are not required.

Cost components of Tank Farm:

Required #2-2:

Calculate, no entry required, the balance of the Asset Retirement Obligation at January 1, 2020.

Required #2-3:

Provide all related entries, annualized, relative to both the Tank Farm and the Asset Retirement Obligation for the year ended December 31, 2020. Note, as per above, any initial entries on January 1, 2020 are not required.

Required #2-4:

Calculate the balance in the Asset Retirement Obligation at December 31, 2020.

Situation #3:

LGL provides the following list of a representation of its financial liabilities.

Required: Is this list a representation of financial liabilities? Indicate, in the right column; Fin = financial liability; Non-Fin = Non-financial liability

Situation #4:

In November, 2020, to secure supply of raw material vital to its manufacturing process, the Vice-President, Manufacturing was anxious to lock into a purchase commitment with the raw material supplier to cover all of its 2021 production. The contract would be for 800,000kg. with deliveries in 2021 to be coordinated with the production schedule.

The contract cost to secure this long-term supply is $26.50/kg. On January 20, 2021, while the financial statements for the year ended December 31, 2020 were still under audit, a new global supplier of the raw material caused a permanent drop (not a short-term market supply and demand) in the price to $23.50/kg.

LGL has yet to take any deliveries of the raw material in 2021.

Required: Ignoring taxes, how will this event be handled/reported, if at all, in the financial statements for the year ended December 31, 2020? Be specific and provide any adjusting entries should they be required.

Situation #5:

LGL is in litigation with a former employee who is suing for wrongful dismissal. At December 31, 2020, the lawyers determined that judgement could go against LGL and additional compensation expense and estimated liability was reported on December 31, 2020 of $220,000.

On February, 4, 2021, while the 2020 financial statement were still under audit, the final judgement was rendered for $185,000 which LGL was required to pay. LGL’s tax rate is 28%.

Required: How, if at all, would this impact the financial statements for the year ended December 31, 2020? Provide any entries, if required.

Longhorn Gate Limited (LGL) Bonds Trading Assignment

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