Question 2:

Sunny Ltd., a hand sanitizer manufacturer, has prepared itsfinancial statements for the year ended at December 31, 2019. OnFebruary 28, 2020, the board of directors authorized to issue thefinancial statements to shareholders. The following events haveoccurred:

1. On December 1, 2019, the board of directors decided to issue$50,000,000, 9% convertible bonds for the purpose of expandingbusiness in other countries. The conversion rate is fixed at 50shares for bond with face value of $1,000. The convertible bondsare offered to the public on January 15, 2020. The market interestrate for a similar bond without conversion option is at 12%.                                                                                     [3 marks]
2. On October 23, 2019, Sunny signed a contract to sell 10,000hand sanitizer to a local store at a price of $200 each. However,due to the increase in the cost of materials, the estimated cost ofmaking one hand sanitizer has been increased to $250. Sunny has todeliver the hand sanitizer to its customer on January 30, 2020.                                                   [4 marks]

3. Under the terms of the sales contract, Sunny undertakes torecall its new formulated sanitizer, for its manufacturing defectswithin six months from the date of sale. The accountants estimatedthat 5% of the sanitizer will be returned for refund. In January2020, Sunny discovered a serious problem in the manufacturingprocess of the new formulated sanitizer. Because of this, Sunnyexpected that 20% of the sanitizer sold in 2019 will be returnedfor refund.    [4 marks]

4. On December 15, 2019, a group of customers reported that thehand sanitizer that they bought in 2019 caused them have seriousskin infection problems. They filed a lawsuit against Sunny onDecember 20, 2019. The company’s attorney said that it was probablethat Sunny would be liable for the case. However, the amount ofdamage could not be estimated.       [4 marks]

5. On February 12, 2020, the above lawsuit case was settled forthe amount of $2,500,000.                                                                                                   [4 marks]
6. Sunny has retail stores in China doing poorly. On February 15,2020, Sunny estimated that those stores might report a loss of$1,500,000 in 2020.                               [4 marks]

7. In May 2019, Sunny had legal disputes with Coco Limited. Unableto reach out-of-court settlement with Coco, Sunny sued Coco forcompensation for damages in August 2018.        In November 2019, Sunnyheard good news about the lawsuit in which the company sued Coco.Sunny’s lawyer is confident that the company will win the case andwill receive about $120,000 in compensation for damages from Cocoin early 2020. Sunny recognized the gain and receivable fromlitigation of $120,000 in year 2019.                               [4 marks]

8. On March 1, 2020, a customer owing $600,000 to Sunny filed forbankruptcy. The financial statements include an allowance fordoubtful debts pertaining to this customer only of $30,000.                                                                                      [3 marks]

Required:

For each of the above event, state the correct accountingtreatments in accordance with Hong Kong Accounting Standards forthe year ended at December 31, 2019. If it is an event after thereporting period, identify whether it is an adjusting ornon-adjusting event. Give reasons for your answer.