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Hello Sir,
I have the doubt in below question :
Humphries Co operates a chain of food wholesalers across the country and its year?end was
30 September 20X1. The final audit is nearly complete and it is proposed that the financial
statements and auditor’s report will be signed on 13 December. Revenue for the year is
$78 million and profit before taxation is $7.5 million. The following events have occurred
subsequent to the year?end.
Receivable
Humphries Co has just become aware that one of its customers is experiencing significant going concern difficulties. There is a receivables balance in respect of this customer at the year?end of $0.3 million. Humphries Co believe that as the company has been trading for many years, they will receive some, if not full, payment from the customer therefore no adjustment has been made for the balance in the financial statements.
Lawsuit
A key supplier of Humphries Co is suing them for breach of contract. The lawsuit was filed prior to the yearend, and the sum claimed by them is $1 million. This has been disclosed as a conitngent liability in the notes to the financial statements. Recent correspondence from the supplier indicates that they are willing to settle the case for $0.6 million. It is likely that Humphries o will agree to this.
Warehouse
Following significant rain on 20 November, one of Humphries Co’s three warehouses was flooded. All of the inventory stored there was damaged and has been disposed of. The insurance company has already been contacted but no response has been received as of yet. No amendments or disclosures have been made in the financial statements.
A –
In respect of the receivable and lawsuit, select the type of event and the appropriate
accounting treatment.
Type of event Accounting treatment
Adjusting Non?adjusting Recognise Disclose
Receivable
Lawsuit
My question – Accounting treatment for receivables should be disclosed only , isnt it ? I am not sure why they have recognized it ?There are two ways of looking at it:
– significant going concern difficulties for a customer is the “classic” adjusting event example (see page 113 of the notes) – that the company “has been trading for many years” is not a valid argument for ignoring the need to write down the asset amount.
– to write down an asset amount has nothing whatsoever to do with contingent liabilities (as clearly there is no liability) – so there is no “disclose” option (meaning it is non-adjusting).
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