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The management board of any company has the general duty to disclose all those breaches, settlements and lawsuits in their annual report which will have an impact on the rights and interests of investors. But the decision of disclosing all the facts regarding a particular case to their members would depend upon the facts and type of membership associated with the case. As per the financial policies, the disclosure of any pending litigation related to a company should be based on the degree of probability of occurrence of an unfavourable outcome (Malhotra, 2015).

There are various factors that should be considered before disclosing a potential or pending litigation in their annual report. Firstly, it is important to determine the estimate for the disclosure. Some of the factors which are important for this disclosure are the number of PRPs, the financial resources associated with these PRPs, joint and several liabilities, liability allocation to each PRP, insurance coverage, the time duration in which investigation should be completed, and lastly related litigations to the given case. These factors make the whole estimation process very difficult.

**Present Value of MLP**

The present value of Periodic rental agreements is equal to the annual rental payment multiplied by PVIFA where n is 4 years and the interest rate is 8%. So,

PV ($) = 50,000*3.5771 = $178,855

The present value of guaranteed residual is given as guaranteed residual multiplied with PVIF where n is 4 years and interest rate is 8%. So,

PV = $40,000*0.7350 = $29,400

Lease Liability is given in addition to the Present value of periodic rental payments and the present value of guaranteed residual. So,

Lease Liability ($) = 178,855 + 29,400 which comes out as $208,255

**Schedule for Lease Amortization**

Here, payment for lease on July 1, 2023, is considered as guaranteed residual.

- Annabel Ltd has to pay $15,000 which is the difference between the studio’s fair value and the guaranteed residual. Another alternative is recognition of a $15,000 loss on June 30, 2022, if known. There are chances of final payment happening later at the time when the fair value of the vehicle has been assessed (Paul, 2008).

**Question 3**

Below are the notes explaining all the calculations mentioned above:

- The calculation for determining projected salary is given as current salary multiplied by nth power of (1+ inflation rate), where n is a total number of years until the long service leave entitlement vests. The assumption made in this particular question is that the inflation rate proxies for the growth rate for wages and there would be a continuation of 2% in it. In the case of Black, a calculation can be given as $40,000* (1.02)^10 which comes out as $48,760.
- The calculation for determination of Accumulated LSL benefit is given as:

Accumulated LSL entitlement = (years of employment)/ (Number of years required) * (Weeks of LSL entitlement)/ 52* Projected salary. In the case of black, the calculation is given as 2/12* 10/52 *$48,760 which comes out as $1,563.

- The calculation for determination of the present value of the long service leave calculation is given as accumulated long service leave benefit divided by nth power of (1+ appropriate government bond rate). Here, n is equal to the total number of years left until long service leave entitlements can be taken. In the case of black, a calculation can be given as $1,563/ 1.08^10 which comes out as $724 (Alan, 2014).

- The determination of the probability that long service leave will be taken would be done by taking reference of previous experience within the organization as the industry as a whole. For example, if an employee has two years of service experience where the probability of staying in the firm until long-service leave is 15% then this case must be taken. At the time when an employee reaches to a pre-conditional period which is 12 years in this case then the probability of making a payment is 100%. In the case of black, the calculation will be given as $724* 0.15 which is given as $109. After the consideration of a total of five employees and taking into consideration all the above calculations, the long service leaves provision at the end of the period should be equal to $16,314.

- For resulting in an LSL expense in the given year of the amount of $3,814 then it is important to raise the carrying amount of the provision account from $12,500 to $16,314 (Akande, 2013).

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Date |
Account Name |
Debit (HK$) |
Credit (HK$) |

30/4/2018 | Purchase of inventory | 3,00,000 | |

30/5/2018 | Inventory monthly payment | 1,00,000 | |

30/6/2018 | Inventory monthly payment | 1,00,000 | |

31/7/2018 | Inventory monthly payment | 1,00,000 | |

31/5/2017 | Purchase of Machine | 2,65,625 | |

31/7/2017 | Payment for machine | 2,65,625 |