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ACCA Applied Skills · Financial Reporting · Provisions and events after the reporting period

Darnley Co has a year end of 31 March 20X6, and its financial statements were authorised for issue on 25 June 20X6. At 31 March 20X6 it had inventory with a cost of $400,000 included at cost. In May 20X6, because of a fall in market prices that began in April 20X6, half of this inventory was sold for $150,000, with selling costs of $10,000; it was the only evidence available. Separately, in April 20X6 a lawsuit that existed at year end was settled for $90,000 against a year-end provision of $60,000. What is the net total reduction in profit before tax for the year ended 31 March 20X6 from adjusting events?

The reduction is $30,000. Only the lawsuit is an adjusting event, increasing the provision from $60,000 to the $90,000 settlement. The inventory price fall arose after the reporting date, so the below-cost sale is non-adjusting and requires no write-down.

  1. A$30,000Correct
  2. B$90,000
  3. C$90,000 plus the inventory adjustment of $60,000, giving $150,000
  4. D$30,000 plus the inventory adjustment of $60,000, giving $90,000

Explanation

The price fall began in April 20X6, after the reporting date, so the inventory sale is non-adjusting and no write-down is made. The lawsuit existed at year end, so it is adjusting: extra charge is $90,000 - $60,000 = $30,000. Options including $60,000 wrongly adjust inventory (cost $200,000 less NRV $140,000 = $60,000).

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