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(a) Explain the terms “adjusting events” and “non-adjusting events” and give three examples of each
(b) Yamfo Retail 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 20X4 will be refunded in July 20X4.
(ii) On June 2, 20X4, three employees were seriously injured as a result of a fire at the company’s warehouse. They have lodged claims seeking damages of GH¢2.0 million from the company. The company’s lawyers have advised that it is probable that the court may award compensation of GH¢400,000.
(iii) Under a new legislation, the company is required to fit smoke detectors at all the stores by December 31, 20X4. The company has not yet installed the smoke detectors.
(iv) On June 20, 20X4, the board of directors decided to close down the Household Appliances Division. However, the decision was made public after June 30, 20X4.
(v) The company has a large warehouse in Kumasi which was acquired under a three-year rent agreement signed on April 1, 20X3. The agreement is non-cancellable 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, 20X4.
Required
Describe how each of the above issue should be dealt with in the financial statements for the year ended June 30, 20X4. Support your point of view in the light of relevant International Accounting Standards.
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ACCOUNTING TREATMENT
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 20X4 and you should assume that the amounts involved are material in each case.
(a) At the year-end there was a debit balance in the books of a company for GH¢15,000, representing an estimate of the amount receivable from an insurance company for an accident claim. In February 20X5, before the directors had agreed the final draft of the published accounts, correspondence with lawyers indicated that GH¢18,600 might be payable on certain conditions.
(b) A company has an item of equipment which cost GH¢400,000 in 20W8 and was expected to last for ten years. At the beginning of the 20X4 financial year the book value was GH¢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 GH¢80,000 at 31 December 20X4.
(c) On 30 November, a company entered into a legal action defending a claim for supplying faulty machinery. The company’s solicitors advise that there is a 20% probability that the claim will succeed. The amount of the claim is GH¢500,000.
(d) An item has been produced at a manufacturing cost of GH¢1,800 against a customer’s order at an agreed price of GH¢2,300. The item was in inventory at the year-end awaiting delivery instructions. In January 20X5 the customer was declared bankrupt and the most reasonable course of action seems to be to make a modification to the unit, costing approximately GH¢300, which is expected to make it marketable with other customers at a price of about GH¢1,900.
(e) At 31 December, a company has a total potential liability of GH¢1,000,400 for warranty work on contracts. Past experience shows that 10% of these costs are likely to be incurred, that 30% may 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.
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Kumasi Ltd is preparing its financial statements for the year ended 30 September 20X4. The following matters are all outstanding at the year end.
(1) Kumasi Ltd is facing litigation for damages from a customer for the supply of faulty goods on 1 September 20X4. The claim, which is for GH¢500,000, was received on 15 October 20X4. Kumasi Ltd’s legal advisors consider that Kumasi Ltd is liable and that it is likely that this claim will succeed. On 25 October 20X4 Kumasi Ltd sent a counter-claim to its suppliers for GH¢400,000. Kumasi Ltd’s legal advisors are unsure whether or not this claim will succeed.
(2) Kumasi Ltd’s sales director, who was dismissed on 15 September, has lodged a claim for GH¢100,000 for unfair dismissal. Kumasi Ltd’s legal advisors believe that there is no case to answer and therefore think it is unlikely that this claim will succeed.
(3) Although Kumasi Ltd has no legal obligation to do so, it has habitually operated a policy of allowing customers to return goods within 28 days, even where those goods are not faulty. Kumasi Ltd estimates that such returns usually amount to 1% of sales. Sales in September 20X4 were GH¢400,000. By the end of October 20X4, prior to the drafting of the financial statements, goods sold in September for GH¢3,500 had been returned.
(4) On 15 September 20X4 Kumasi Ltd announced in the press that it is to close one of its divisions in January 20X5. A detailed closure plan is in place and the costs of closure are reliably estimated at GH¢300,000, including GH¢50,000 for staff relocation.
Required
State, with reasons, how the above should be treated in Kumasi Ltd’s financial statements for the year ended 30 September 20X4
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The following information relates to the financial statements of Kumasi Ltd for the year to 31 March 20X4.
The mining division of Kumasi Ltd has a 3 year operating licence from an overseas government. This allows it to mine and extract copper from a particular site. When the licence began on 1 April 20X3, Kumasi Ltd started to build on the site. The cost of the construction was GH¢500,000.
The overseas country has no particular environmental decommissioning laws. In response to the global sustainability agenda, Kumasi Ltd has developed its own policy for sustainable operations. It has made information about this policy public and has provided examples to demonstrate that it is a responsible company that believes in restoring mining sites at the end of the extraction period. The cost of removing the construction at the end of the three years is estimated to be GH¢100,000.
The cost of the site currently shown in the trial balance is GH¢500,000. The company has a cost of borrowing of 10%.
Required
Explain the correct accounting treatment for the above (with calculations if appropriate).
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