#1
Eternity is finalising its accounts for the year ended 31 December 2016. The following events have
arisen since the year end and the financial director has asked you to comment on the final accounts:
(1)
At 31 December 2016 trade receivables included a figure of $250,000 in respect of Wico. On
8 March 2017, when the current debt was $200,000, Wico went into receivership. Recent
correspondence with the receiver indicates that no amounts will be paid to unsecured creditors.
(2)
On 15 March 2017 Eternity sold its former head office building for $2.7 million. At the year
end the building was unoccupied and carried at a value of $3.1 million.
(3)
Inventories at the year end included $650,000 of a new electric tricycle. In January 2017 the
EC declared the tricycle to be unsafe and prohibited it from sale. An alternative market, in
Bolivia, is being investigated, although the current price is expected to be cost less 30%.
(4)
Future, an overseas subsidiary was nationalised in February 2017. The overseas authorities
have refused to pay any compensation. The net assets of Future have been valued at $200,000
at the year end.
(5)
Freak floods caused $150,000 damage to a branch of Eternity in January 2017. The branch
was fully insured.
(6)
On 1 April 2017 Eternity announced a 1 for 1 rights issue aiming to raise $15 million.
Required:
Comment on the accounting treatment of the matters described above.
#2
You have been asked to advise on the appropriate accounting treatment for the following situations
arising in the books of various companies. The year end in each case can be taken as 31 December
2016 and you should assume that the amounts involved are material in each case.
(1)
At the year end there was a debit balance in the books of a company for $15,000,
representing an estimate of the amount receivable from an insurance company for an accident
claim. In February 2017, before the directors had agreed the final draft of the published
accounts, the amount of the claim was finally settled as $18,600.
(2)
A company has an item of equipment which cost $400,000 in 2013 and was expected to last
for 10 years. At the beginning of the 2016 financial year the carrying amount was $280,000.
It is now thought that the company will soon cease to make the product for which the
equipment was specifically purchased. Its recoverable amount is only $80,000 at 31
December 2016.
(3)
On 30 November an entity entered into a legal action defending a claim for supplying faulty
equipment. The company’s solicitors advise that there is a 20% probability that the claim
will succeed. The amount of the claim is $500,000.
(4)
An item has been produced at a manufacturing cost of $1,800 against a customer’s order at an
agreed price of $2,300. The item was in inventories at the year end awaiting delivery
instructions. In January 2017 the customer was declared bankrupt and the most reasonable
course of action seems to be to make a modification to the unit, costing approximately $300,
which is expected to make it marketable with other customers at a price of about $1,900.
(5)
At 31 December a company has a total potential liability of $1 million for warranty work on
contracts. Past experience shows that 10% of these costs are likely to be incurred, that 30%
may possibly be incurred but that the remaining 60% is highly unlikely to be incurred.
Required:
For each of the above situations outline the accounting treatment you would recommend and give
the reasoning of principles involved. The accounting treatment should refer to entries in the
books and/or the year-end financial statements as appropriate.
#3
“An entity should adjust the amounts recognised in its financial statements to reflect adjusting events
after the reporting period.
“An entity should not prepare its financial statements on a going concern basis if management
determined after the balances sheet date either that it intends to liquidate the entity or to cease trading,
or that it has no realistic alternative but to do so.”
(a)
State, with reasons, which of the following events occurring after the reporting period
provide additional evidence of conditions existing at the end of the reporting period:




(b)
bankruptcy of a customer who owed money to the entity at year end;
flood damaging inventories held at year end;
receipt of long term loan from bank;
issue of credit note for goods sold before year end.
On 18 July, a company discovers that significant inventories stored at a remote warehouse have
never been included in the financial statements due to a repeated oversight.
Required:
Advise how these inventories should be treated and disclosed in the financial statements at
30 June.
(c)
Distinguish between an event after the reporting period and a contingent liability.
(d)
State the details to be disclosed in respect of contingent liabilities.
(e)
State the TWO circumstances in which IAS 1 “Presentation of Financial Statements”
requires certain additional disclosures in respect of going concern.
137.1
Which of the following defines a provision in accordance with IAS 37?
A
B
C
D
A liability of uncertain timing or amount
A possible obligation arising from past events that is of uncertain timing or amount
An adjustment to the carrying amount of assets
A present obligation which is not recognised
137.2 An entity is required to measure a provision at the best estimate of the amount required to settle the
obligation at the reporting date.
Which one of the following estimates will give a best estimate when a provision involves a
large population of items?
A
B
C
D
One which weights all possible outcomes according to their probabilities
The mid-point of a discrete range of possible values
The individual most likely outcome
An amount higher or lower than the individual most likely outcome if other possible
outcomes are mostly higher or lower
E
137.3 Inspire is the defendant in a patent infringement lawsuit. Inspire’s lawyers believe the there is a
30% chance that the court will dismiss the case and Inspire will not have to make any payout.
However, if the court rules in favour of the claimant, they believe that there is a 20% chance
that Inspire will be required to pay damages of $200,000 (the amount sought by the claimant)
and an 80% chance that damages will be $100,000 (the amount that was recently awarded by
the same judge in a similar case). The court is expected to rule sometime in 2017 and there is
no indication that the claimant will settle out of court.
What is the best estimate of the provision for the lawsuit that should be recognised in
Inspire’s statement of financial position at 31 December 2016 in accordance with IAS
37?
A
B
D
$Nil
$100,000 C $120,000
$200,000
137.4 At 31 December 2016 Oberon is pursuing a claim against an insurance company through legal
processes. The court is expected to rule later in 2017. At the reporting date Oberon’s legal
advisers believe there is a 70% chance that Oberon will win the case. Furthermore, they
believe that there is a 20% chance that Oberon will be awarded $200,000 (the amount it is
seeking) and an 80% chance of an award of $100,000 (the amount that was recently awarded
by the same judge in a similar case).
How should this event be treated in Oberon’s financial statements for the year ended 31
December 2016?
A
B
C
D
As an asset measured at $200,000
As an asset measured at $100,000
As a contingent asset
It should not be included in the financial statements
138.1 Which of the following material events occurring after the end of the reporting period are
adjusting events?
(1)
(2)
(3)
(4)
Sales of inventory for less than cost
Payment received from a customer whose debt had been written off
Sale of a subsidiary company
A flood in the warehouse destroying inventory
A
B
C
D
1 and 2
2 and 3
3 and 4
1 and 4
138.2 On 15 March 2017 Fumi authorised for issue its financial statements for the year ended 31
December 2016. On 10 March 2017 the entity’s factory and several items of equipment were
damaged in an earthquake. The damage is estimated to cost $700,000 of which $450,000 is
expected to be covered under insurance policies.
How should this material event have been included in Fumi’s financial statements for the
year ended 31 December 2016?
138.3
A
B
C
As a provision of $700,000
As a provision of $250,000
As a contingent liability of $700,000 and a contingent asset of $250,000
D
As a note disclosure of the event
Which of the following events between the reporting date and the date the financial
statements are authorised for issue must be adjusted in the financial statements?
A
B
C
D
Declaration of ordinary dividends
Decline in market value of investments
Discovery of a fraud revealing that inventory had been stolen
Announcement of a major restructuring
138.4 On 15 March 2017 Ramin authorised for issue its annual financial statements for the year ended
31 December 2016. On 10 March 2017 Ramin’s factory, equipment and inventory were
damaged in an earthquake. The damage is uninsured and management has determined that
Ramin is unable to continue trading.
On what basis should Ramin’s financial statements for the year ended 31 December 2016
have been prepared?
A
On a going concern basis with a note disclosing the earthquake as a non-adjusting
event
B
On a basis other than going concern with a statement of that fact and a note disclosing
the earthquake as the reason
C
On a going concern basis with adjustments for the damage including write-downs of
the assets
D
On a going concern basis with no reference to the earthquake as it is not an adjusting
event