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AYB 340 COMPANY ACCOUNTING - Case study 2 Unrecorded liability




Question;AYB 340 COMPANY ACCOUNTING - Case study 2 Unrecorded liabilityCase;study 2 unrecorded liability;Scorpio Ltd has finally;concluded its negotiations to take over Norma Ltd, and has secured ownership of;all the shares of Norma Ltd. One of the areas of discussion during the;negotiation process was the current court case that Norma Ltd was involved in.;the company was being sued by some former employees who were retrenched, but;are now claiming damages for unfair dismissal. The company did not believe that;it owed these employees anything. However, realising that industrial relations;was an uncertain area, particularly given the country?s current confusing;industrial relations laws, it had raised a note to the accounts issued before;the takeover by Scorpio Ltd reporting the existence of the court case as a;contingent liability. No monetary amount was disclosed, but the company?s lawyers;had placed a $56,700 amount on the probable payout to settle the case.;The accounting staff of;Scorpio Ltd is unsure of the effect of this contingent liability on the;accounting for the consolidated group after the takeover. Some argue that it is not a;liability of the group and so should not be recognised on consolidation, but;are willing to accept some form of note disclosure. A further concern;being raised is the effects on the accounts, depending on whether Norma Ltd;wins or loses the case. If Norma Ltd wins the court case, estimated to be;around $40,000.;Required;Give the group accountant your opinion on the accounting;at acquisition data for consolidation purposes, as well as any subsequent;effects when the entity either wins or loses the case. Assume FV= $40,000 on consolidation


Paper#40710 | Written in 21-Dec-2015

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