Question

Lion Pte Ltd is finalising its financial statements for the year ended 31 December 20X1. The date of authorisation of financial statements for issue was 14 March 20X2 and the annual general meeting is scheduled on 23 April 20X2. The following events occurred as follows:

(a) Inventory held by Lion Pte Ltd was recorded at its cost of $1,104,000 at 31 December 20X1 in the statement of financial position. The whole inventory was damaged by flood water in December 20X1. The entity sold 80% of the inventory for $616,000 on 7 February 20X2.

(b) On 9 August 20X1, the company invested $3 million in a promising high technology company Tiger Ltd. The value of the investment rose to $3.5 million as at 31 December 20X1. However, on 14 January 20X2, a major earthquake struck the region where the factory of Tiger was located, causing its share price to plummet. The value of the investment dropped to $1.5 million the next day.

Illustrate the appropriate accounting treatment of the events in the financial statements of Lion Pte Ltd for the year ended 31 December 20X1. Prepare the necessary journal entries, if necessary.

Answer 1

a)

The sale of damaged inventory on 7th February 20X2 is an adjusting event

Events occur between the end of the reporting period(31-12-20X1) and the date when financial statements are authorized for issue(14th March 20X2)

If any events occur after the end of the reporting period that provide further evidence of conditions

that existed at the end of reporting period(31-12-20X1) (i.e. Adjusting Events),

then the financial statements must be adjusted accordingly.

Accounting Entry

Dr

Loss on Damaged Goods

4,88,000

Cr

Inventory

4,88,000

(11,04,000-616,000)

b)

The value of the investment dropped to $1.5 million from $3.5 million due to major earth quake on 14-Jan-20X2

This is a non- adjusting event, ie Those events that reflect conditions that arose after the end of reporting period(31-Dec-20X1)

Earthquake was on 14-Jan-20X2.There is no evidence of conditions of earth quake which is happened on 14-Jan-20X2

Entity shall not adjust the financial statements in respect of those events after the end of reporting period

The nature and estimate of the financial impact of material non-adjusting events shall be disclosed in the financial statements.