Question #2 (12)

Pristine Resources Company, (PRC), a privately held company with widely traded bonds on the open market and with a December 31, year-end had the following items and issues pertaining to its 2020, year-end. Assume all amounts provided are material to the operations of PRC.

Required:

Respond to each item as its treatment/reporting in the financial statements for 2020 and, if required, provide related accounting entries. If it is a disclosure/presentation issue, indicate the proper classification on the Statement of Financial Position.

1.A wrongful dismissal lawsuit for $1.2 million was filed against PRC in the last quarter. Although the case has yet to go to court, legal counsel has advised management that employment conditions and position responsibilities which might place the employee under undue distress and could be construed as a constructive dismissal were not evident and the lawsuit was without merit. PRC sought a second legal opinion who concluded also that the suit was frivolous and without merit. PRC asked the lawyers to provide an indication of awards in precedent cases wherejudgements were rendered to which thelawyer indicated that the norm for such settlements were usually in range ($ and likelihood) of $300,000, 20%, $400,000, 50%, $700,000, 20%, $1,000,000, 10%. PRC management proceeded to record an entry based on the applicable standard. (2)

2.PRC has a $2,500,000 note payable to a private venture capital company due on August 31, 2021. On December 21, 2020, PRC entered into a refinancing agreement with the same lender, whereby $2,000,000 of the note will be refinanced for an additional five years after the current note falls due on August 31, 2021 and the balance of $500,000 will be paid from current cash reserves. (2)

3.The VP Finance recognizes the importance of earnings-per-share (EPS) reporting and is asking you to clarify a few points regarding EPS. Her staff has performed some preliminary calculations for the year just ended. She asks you the following questions to which you reply.

3.1 We have several instruments that could result in preferred shares being issued if they were exercised. (1)

3.2 Do all of our convertible instruments enter in to the calculation of the EPS? (1)

4.PRC issued on January 1, 2015, $10,000,000, 4%, interest paid semi-annually (June 30 & December 31), 20 year debenture bonds at a market yield of 5% (Bank of Canada rate at this time was 2.5%) and proceeded to account for these bonds at amortized cost. As at December 31, 2020, PRC elected to report these bonds a fair value when the market rate of interest was 6% (Bank of Canada rate at this time was 3%).

Required: What classification, description and amount would be reported on the properly classified liability section of the Statement of Financial Position as of December 31, 2020? (3)

5.The Vice-President, Finance takes you aside informally and indicates she believes the Vice-President, Marketing and Sales is about quit as he does not get along with the Chief Executive Officer. The Vice-President, Marketing and Sales has significant stock options with an entitlement thus far of several million dollars which will vest in a year and the grant date was two years ago. The Vice-President, Finance asks you what will be the financial reporting consequences in the 2020 results if the Vice-President, Marketing and Sales quits before the 2020 financial statements are finalized. (1)

6.PRC owns a waste management disposal division that has several large dump/decomposition sites and must comply with British Columbia's strict environmental requirements in restoring these sites to environmental standards at the end of sites' useful lives. PRC determines that the future cost in 20 year's time to satisfy current regulatory requirements will be $15,000,000. Of this future amount, there is no amount attributable to the initial site acquisitions and the environmental deterioration is expected to occur evenly over the 20 year period. PRC will commence the recognition of a Remediation Liability from the beginning of 2020, the current financial year. PRC applies a discount rate of 3.5%.

Required: Present the properly classified, description and amount that would be reported in respect of this future obligation on the Statement of Financial Position as at December 31, 2020. (2)