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Question 15, ACCA F7 Revision Kit Mock 2 has the following question:
15 A company’s statement of profit or loss showed a profit before tax of $1.8 million. After the end of the reporting period and before the financial statements were authorised for issue, the following events took place.
(i) The value of an investment held at the year end fell by $85,000.
(ii) A customer who owed $116,000 at the year end went bankrupt owing a total of $138,000.
(iii) Inventory valued at $161,000 in the statement of financial position was sold in year-end condition for $141,000.
(iv) Assets with a carrying amount at the year end of $240,000 were unexpectedly expropriated by the government.
What is the company’s profit before tax after making the necessary adjustments for these events?
The answer given in the book is $1.664m
$1,664,000
$’000
Unadjusted profit 1,800
Irrecoverable debt (116)
Loss on sale of inventory (20)
1,664According to IAS 10, Evidence of a permanent diminution in the value of a long-term investment prior to the year end is an adjusting event. Therefore, the company’s PBT must deduct $85k. In addition, I think 138k of trade receivables must be deducted instead of 116k because the customer owns the total of 138k.Therefore, the answer should be $1557k.
Please help me to verify this!
Thank you!Extract from the question:
“After the end of the reporting period and before the financial statements were authorised for issue, the following events took place”
So the fall in value occurred AFTER the year end and is therefore a non-adjusting subsequent event
“A customer who owed $116,000 at the year end went bankrupt owing a total of $138,000.” – as at the year end the debt was $116,000 so that’s the amount that should be written off as an adjusting event. The additional $22,000 is a non-adjusting event – the bankruptcy gave us a better indication of the value of the current asset as at the year end – it fixed with greater certainty an amount or estimate as at the year end
The additional $22,000 did NOT relate to a condition or situation that existed as at the year end and is therefore not an adjusting event
” Inventory valued at $161,000 in the statement of financial position was sold in year-end condition for $141,000.”
The post year-end sale fixed with greater certainty an amount or estimate as at the year end – inventory should be valued at the lower of cost and net realisable value and the post year-end sale gave us a more accurate figure for the net realisable value so it DID relate to a condition or situation that existed as at the year end and is therefore an adjusting event
“Assets with a carrying amount at the year end of $240,000 were unexpectedly expropriated by the government.”
The expropriation by the government did NOT relate to a condition or situation that existed as at the year end and is therefore not an adjusting event
OK?
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