Question

Serena Limited is a Newfoundland- based manufacturer of building materials. In the fourth quarter of 20X1, the Serena Board of Directors agreed with senior management that the company needed to restructure its operations so as to be more competi-ive, as competition from abroad was beginning to become more intense. Therefore, the Board reviewed and accepted management’s recommendations for the following series of actions:
a. Production of insulation products will cease. Instead, a Quebec company will be contracted to supply insulation products that will be sold under Serena’s label. Serena’s insulation production equipment will be sold, assuming a buyer can be found; if no buyer can be found, the facilities will be scrapped. The current carrying value of the facilities is $ 2,300,000. Serena’s production manager estimates that the equipment could be sold for about $ 1 million, provided that Serena paid the dismantling (estimated at $ 100,000) and shipping costs (which would depend on the location of the buyer).
b. The 15 employees currently involved exclusively in insulation production will be given eight weeks’ severance pay. The average wage is $ 800 per week. Eight other employees who are only partially involved in the insulation division will be reassigned to other duties within the organization.
c. The production processes in the adhesives division will be modernized and streamlined. Computer- controlling mixing will be introduced to maintain a more consistent product quality. The cost of the upgrade has been priced at $ 1,700,000. Employee retraining will be required, which will cost an additional $ 160,000. The old equipment will be dismantled and the salvage sent for recycling.
By the end of 20X1, the employees of the insulation division had been notified of the outsourcing of insulation products and the planned shut- down of production. Management set 20 April 20X2 as the changeover to outsourcing. Of course, the restructuring plan had become public knowledge by that time, a development that was causing some agitation in the provincial government.
By 20X1 year- end, Serena had entered into a contract for supplying the new computerized equipment for adhesives mixing; the value of the contract was $ 1,350,000 and Serena had paid a 10% advance to the supplier. Other equipment (estimated to cost $ 420,000) had not yet been ordered, although a nonbinding memorandum of agreement had been reached with a supplier.

Required:
Assume that Serena Limited is a public company. How would the events described above be reported in its financial statements at the end of 20X1? Be specific.



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  • CreatedFebruary 17, 2015
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