Question

Desla Ltd finalised their financial statements for the year ended 30 June 2019 and authorised them for issue on 23 August 2019. The new managing director is unsure about the treatment of the following eight material events and has asked for your professional advice.

(i) 20 June 2019 – An error was discovered in the measurement of cash and accounts payable due to an omitted transaction. The omitted transaction was for $640 000.

(ii) 20 July 2019 – The directors declared a final dividend for the year ended 30 June 2019 of 10 cents per share. The total dividend payable was $450 000.

(iii) 24 July 2019 – A fire occurred at a Desla Ltd factory in May 2019, and some machinery was damaged as a result. No impairment loss related to the fire had been recognised in the financial statements as at 30 June 2019. It has now been assessed that an impairment loss of $300 000 should be recognised for the damaged machinery. Machinery is measured using the cost model.

(iv) 1 August 2019 – At the 30 June 2019 balance date, the general ledger inventory account included items of inventory measured at a cost of $600 000. On 1 August 2019, it is discovered that due to the factory fire damage in May, the net realisable value for these items of inventory is $400 000.

(v) 2 August 2019 –GreenTech Ltd, a significant supplier of Desla Ltd, initiated legal proceedings against Desla Ltd concerning a breach of contract; the breach of contract happened after the 30 June 2019 balance date. Desla Ltd is being sued for $320 000. A lawyer has suggested the likelihood of paying this amount is “less than probable.”

(vi) 15 August 2019 – Desla Ltd discovered that one of its debtors, Dealers Ltd, who owed

$500 000 as at the 30 June 2019 balance date, had ceased trading in June 2019. The full amount is uncollectible, but at balance date, it was not considered doubtful.

(vii) 20 August 2019– An investment of Desla Ltd, consisting of 20 000 shares, was measured at balance date at $5.20 per share. The shares are now listed on the stock exchange at $15.20 per share.

(viii) 26 August 2019 – Desla Ltd discovered that one of its buildings, in another city, was destroyed by an earthquake on 25 August 2019.  Before the earthquake, the building had a carrying amount of $1 750 000.

Prepare a professional report for the managing director of Desla Ltd to explain the correct treatment of the above eight events. NZ IAS 10 Events after the Reporting Period must be referred to in the introduction to your report.

Professional Report for Desla Ltd

(i) 20 June 2019

Question 3 continued:

(ii)  20 July 2019

(iii) 24 July 2019

(iv) 1 August 2019

Question 3 continued:

(v)  2 August 2019

(vi) 15 August 2019

(vii) 20 August 2019

Question 3 continued:

(viii) 26 August 2019

Conclusion:

Answer 1