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Hi Mike
I attempted the June 2013 question paper with the question below :
(b) Trade receivable On 1 June 2013, a notice was received from administrators dealing with the winding up of Terrier Co, following its insolvency. The notice stated that the company should be in a position to pay approximately 10% of the amounts owed to its trade payables. Poodle Co, the parent company of the Group, includes a balance of $1·6 million owed by Terrier Co in its trade receivables.
The year end was March 2013. In my answer to the question which was:
Assess the implications of the completion for the group audit, explaining any adjustments that maybe necessary to the consolidated financial statements, and recommending any further procedures necessary;In my answer to the question, I explained that it was material (based on the percentage towards profit and assets) and went further on to state that as this had occurred subsequent to the year end, no adjustment was necessary, but disclosure was required as this was material (i have paraphrased my answer).
The solution mentioned otherwise: the examiner wanted the answer to reflect that an adjustment was required. This then confused me because nothing had been mentioned that towards the financial year end, this matter was in discussion. Had it mentioned that, then I would have proposed an adjustment to the financial statements.
Is there something that I missed in reading the question?
you did not read the answer requirement
it says:
(i) Assess the implications for the completion of the Group audit, explaining any adjustments that may be
necessary to the consolidated financial statements, and recommending any further procedures necessary;
andread the words [adjustments], there you get your idea
So in this case,
DR bad debts 1.44m
CR trade receivables 1.44mSorry Mike i hijacked another thread again..just to practice more
Yes, ok, but try not to make too much of a habit of it. There is a general forum where you can get involved as much as you want!
Kuda, an adjusting subsequent event is one that relates to a condition or situation that existed at the date of the entity’s accounting year end
OR
it fixes with greater certainty an amount or estimate as at the year end
In the case of a receivable going bad after the end of the year, that’s a tricky one
Let’s assume that the entity had a balance of $1,000 as at 31 March year end and, on 5 April, we received the amount outstanding
On 2 May the customer ordered and we delivered $4,000 worth of goods and on 1 June, the customer declared themselves bankrupt
The debt of $1,000 as at our year end was good and it was actually settled. The subsequent event of the customer’s declaration of bankruptcy has no affect on the value of the debt as at the year end and, in fact, we can see that that debt was paid in full
But what if ….. what if that $1,000 outstanding at 31 March was still outstanding when we delivered the additional goods on 2 May and the customer declared bankruptcy on 1 June
That $1,000 outstanding as at 31 March is now no longer recoverable so the subsequent event has fixed with greater certainty the value of that specific $1,000 – it turns out that it’s worthless so there is an adjusting event re that $1,000 (we need to reduce profits and receivables in the year end financial statements)
Bad debts are a problem when it comes to adjusting and non-adjusting subsequent events!
OK?
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