Question

AB Ltd engaged in manufacturing facility and has year end of 31 December 2012. Its date of authorization of financial statements for issue was 10 February 2013 and the annual general meeting is scheduled on 7 March 2013. The following events occurred as follows:

(a) The company's major warehouse and the inventory it contained, was completely damaged because of a fire explosion took place on 12 January 2013. The warehouse and the inventory were to have a carrying value $20 million and $12 million respectively on this date.
The company is expected to recover up to maximum of $18 million as it has not updated its insurance cover. The operations of the entity were severally interrupted and the entity expects to face losses for coming few years.

(b) A particular type of inventory held by AB Ltd at a different location was recorded at its cost of $920,000 at 31 December 2012 in the statement of financial position. Th&e entity sold 70% of this inventory for $560,000 on 15 January 2013, incurring a commission expense of 15% of the selling price of the inventory.

(iii) The government introduced tax changes on 13 March 2013, due to which the tax liability recorded by entity at 31December 2012, will increase by $960,000.

Required
Explain the appropriate accounting treatment of the events in the financial statements of AB Ltd and prepare journal for adjusting events and disclosure if needed

Answer 1

Events occurring after the end of reporting period and before the date when financial statements are authorized for issue, may either required adjustment in financial statements or said events may require the disclosure in the financial statement, without any adjustment. It depends upon the nature of event

1. Damage to Warehouse and inventory due to fire , which took place on 12-01-2013

a) This event does not indicate that the assets of the entity were impaired at the end of reporting period and as such reporting amount of Warehouse and inventory will not be adjusted in the books as as 31-12-2012.Thus no loss will be provided on account of such fire

b) However, since event is material one, as it has led to huge loss and it’s expected to affect the furure working, a detailed notes should be given in the financial statement for period ending 31-12-2012

2. Selling of 70% stock at lower price

a) The net selling price of 70% stock, existing as at 31-12-2012 and sold on 15-1-2013, was $ 4,76,000 and basis this expected selling price of entire stock as at 31-12-2012 came to $ 6,80,000

b) The afore-said event indicate that market value of stock has declined and this is effect the valuation of stock as at 31-12-2012, being lower of cost price or market price (net of selling expenses) .

c) Accordingly, the value of stock will be valued at lower price of 6,80,000

d) Thus entry for closing stock as at 31-12-2012 would be as under;-

Closing Stock A/c – Dr $6,80,000

To Trading A/C -                              $ 6,80,000

(Being closing stock valued at Lower of cost or Market Price)

3. Change in Taxation law on 13-3-2013, effecting the tax liability as at 31-12-2012

a) The afore-said event is not a event occurring after reporting date, which required any adjustment or disclosure in financial statement as at 31-12-2012, as this event happened after the authorization of financial statement or even after AGM

b) The impact of said item will be adjusted in financial statement for the period ended 31-12-2013, with appropriate disclosure