At its May 25, 2003, meeting, the Board of Directors of Bravo Company approved a plan to
Question:
At its May 25, 2003, meeting, the Board of Directors of Bravo Company approved a plan to consolidate certain production facilities. A facility in Arkansas was to be closed on October 1, 2004, terminating 300 employees working there. On June 1, 2003, Bravo notified the employees of the restructuring plan. In order to encourage the employees to stay at the facility until the termination date, Bravo agreed to pay each employee $20,000 on April 1, 2005, six months after termination. Based on its traditional annual employee turnover of 80.5%, Bravo anticipated that 242 employees will collect the benefit. The six-month rate for U.S. Treasury securities at June 1, 2003, was 1.5%. Bravo's most recent bank loan required an interest rate of LIBOR plus 2.5%. Bravo therefore added this risk factor of 2.5% to the 1.5% risk-free rate to arrive at a credit-adjusted risk-free interest rate of 4 %. This rate resulted in a present value factor of 0.98039 for the six-month period.
Required:
a. In reporting to its U.S. –based lender in accordance with US GAAP, how should Alpha Co. account for the restructuring program for the year ended June 30, 2003?
b. Provide all journal entries for June 1st, 2003, June 30th, 2003, October 31st, 2004 and Nov 30th, 2004.
Fundamentals of Cost Accounting
ISBN: 978-0077398194
3rd Edition
Authors: William Lanen, Shannon Anderson, Michael Maher