Q1: a) What do you understand by the terms “adjusting events” and “non-adjusting
events”? Give three examples of each. (05)
(b) J-Mart Limited, a chain of departmental stores has distributed its operations into four
Divisions i.e. Food, Furniture, Clothing and Household Appliances. The following
information has been extracted from the records:
(i) The company allows the dissatisfied customers to return the goods within 30 days. It is
estimated that 5% of the sales made in June 2008 will be refunded in July 2008.
(ii) On June 2, 2008, three employees were seriously injured as a result of a fire at the
company’s warehouse. They have lodged claims seeking damages of Rs. 2.0 million from the
company. The company’s lawyers have advised that it is probable that the court may award
compensation of Rs. 400,000.
(iii) Under a new legislation, the company is required to fit smoke detectors at all the stores
by December 31, 2008. The company has not yet installed the smoke detectors.
(iv) On June 20, 2008, the board of directors decided to close down the Household
Appliances Division. However, the decision was made public after June 30, 2008.
(v) The company has a large warehouse in Lahore which was acquired under a three-year
rent agreement signed on April 1, 2007. The agreement is noncancelable and the company
cannot sub-let the warehouse. However, due to operational difficulties, the company shifted
the warehouse to a new location.
(vi) A 15% cash dividend was declared on July 5, 2008.
Required:
Describe how each of the above issue should be dealt with in the financial statements for
the year ended June 30, 2008. Support your point of view in the light of relevant
International Accounting Standards.
Q2: Finance Manager of RR Limited approached you to discuss implications of
following events on the financial statements of the company for the year ended June
30, 2005, which are to be placed before the Board of Directors for approval on
August 28, 2005:
(a) Trade debts as at June 30, 2005 include a debt of Rs. 500,000 recoverable from Mr.
P, who was declared insolvent on August 05, 2005.
(b) A computer software having carrying value of Rs. 1.5 million had been giving
operational problems since May, 2005. It became totally inoperative in July, 2005. It
took 25 days and a cost of Rs. 31,000 for rectification.
(c) Investments of the company amounting to Rs.10 million at the year end were
disposed off for Rs. 6 million in response to a market crash on July 27, 2005.
(d) At the year end, the company had 950 laptops of a good brand each costing
Rs.65,000. There was rising trend of prices in the market, which influenced the
company’s sale policy and these computers were retained in stock till July 25, 2005
when market price started falling and within one week’s time declined to Rs.68,000.
This situation forced the management to start selling. However, the whole stock
could be sold till August 22, 2005 and fetched total sale proceeds of Rs.40.85 million.
(e) On May 28, 2005, the head of sales department had placed his suggestion to the
Chief Executive Officer (CEO) for a free after-sale-service offer for two years to
customers, effective April 15, 2005. However, the CEO approved the scheme on July
15, 2005 and it was announced by the company on the same date. It is expected that
service cost attributable to sales made during April 15, 2005 to June 30, 2005 would
be Rs. 150,000.
Required:
Suggest appropriate accounting treatment in each case with proper reasoning.
Q3: The following information pertains to Skyline Limited (SL) for the financial year ended
December 31, 2010:
(i) A customer who owed Rs. 1 million was declared bankrupt after his warehouse was
destroyed by fire on February 10, 2011. It is expected that the customer would be able to
recover 50% of the loss from the insurance company.
(ii) An employee of SL forged the signatures of directors and made cash withdrawals of Rs.
7.5 million from the bank. Of these, Rs. 1.5 million were withdrawn before December 31,
2010. Investigations revealed that an employee of the bank was also involved and therefore,
under a settlement arrangement, the bank paid 60% of the amount to SL on January 27, 2011.
(iii) SL has filed a claim against one of its vendors for supplying defective goods. SL’s legal
consultant is confident that damages of Rs. 1 million would be paid to SL. The supplier has
already reimbursed the actual cost of the defective goods.
(iv) A suit for infringement of patents, seeking damages of Rs. 2 million, was filed by a third
party. SL’s legal consultant is of the opinion that an unfavourable outcome is most likely. On
the basis of past experience he has advised that there is 60% probability that the amount of
damages would be Rs. 1 million and 40% likelihood that the amount would be Rs. 1.5
million.
Required:
Advise SL about the amount of provision that should be incorporated and the disclosures
that are required to be made in the financial statements for the year ended December 31,
2010.
Q4: Terrific Industries Limited (TIL) is in the process of preparing its financial
statements for the year ended 31 December 2012. As the Chief Financial Officer of
the company, following matters are under your consideration:
i) The board of directors, in their meeting held on 26 December 2012, approved the payment of
bonus to sales team.
ii) On 29 December 2012, the Federal Government announced a policy whereby it allowed the
import of a product which is produced by TIL locally. As a result of competition, TIL
anticipates that the sale of this product would decline considerably.
iii) On 5 January 2013, owing to liquidity constraints and poor recovery position, the directors
introduced a policy under which all customers having outstanding balances of more than 12
months were allowed to settle their accounts by paying 80% of the outstanding amount within
30 days. This policy resulted in the recovery of Rs. 40 million.
iv) On 10 January 2013, a case pending before the Income Tax Appellate Tribunal was decided
in favour of the company. An amount of Rs. 60 million had been provided by the company in
this regard.
v) On 11 January 2013, the factory of a debtor, who owed an amount of Rs. 22 million at year
end, was destroyed in a fire. No recovery is expected from this debtor.
vi) On 27 February 2013, TIL announced issue of 25% bonus shares for the year ended 31
December 2012.
Required:
State how the above matters should be treated in TIL’s financial statements for
the year ended 31 December 2012. You may assume that all the above matters are
material to the company.