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10 marksSocial, Ethical, and Reporting Considerations

CAPE Accounting Unit 1 · 2011 · Paper 2 · Question 3(d)

Three independent legal situations relate to Montego Company: (i) an injured worker suing for 800 000 with unfavourable outcome reasonably possible and estimated settlement 250 000 to 500 000; (ii) a breach of contract lawsuit for 350 000 where an unfavourable outcome is probable and estimated damages are between 100 000 and 250 000; (iii) a lawsuit where it is probable Montego Company will be awarded $1 000 000 in damages from a customer.

Discuss the proper accounting treatment, including any required note disclosures, for EACH situation in the financial statements / accounting records of Montego Company.

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Other parts of this question

  1. 3(a)(i)Compute the current ratio for both companies.[2 marks]
  2. 3(a)(ii)Compute the acid-test (quick) ratio for both companies.[2 marks]
  3. 3(a)(iii)Compute the accounts receivable collection period for both companies.[4 marks]
  4. 3(a)(iv)Compute the inventory turnover ratio for both companies.[2 marks]
  5. 3(a)(v)Compute the debt to total assets ratio for both companies.[2 marks]
  6. 3(a)(vi)Compute the debt to equity ratio for both companies.[2 marks]
  7. 3(a)(vii)Compute the times interest earned ratio for both companies.[3 marks]
  8. 3(b)Prepare a report for the bank outlining the performance of EACH company in terms of liquidity and solvency.[6 marks]
  9. 3(c)Indicate which of the two companies should receive the loan AND give ONE reason why it should.[2 marks]

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