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CA Intermediate · Advanced Accounting · AS 4 Contingencies and Events occurring after the Balance Sheet Date

Godavari Pharma Ltd closed its books on 31 March 2026, and its board approved the accounts on 28 May 2026. The following occurred: (i) on 10 April 2026 a court settled a damages suit pending since 2024 and ordered the company to pay Rs 5,00,000, against which the company had made a provision of Rs 2,00,000; (ii) on 15 April 2026 the board proposed a dividend of Rs 3,00,000 for 2025-26; (iii) on 20 April 2026 it discovered a fraud of Rs 1,00,000 that occurred in February 2026 and had not been recorded. Ignoring tax, what is the net additional charge to the 2025-26 profit and loss account arising from adjusting events? Treat the dividend as per AS 4 as revised for dividends proposed after the year end.

The net additional charge is Rs 4,00,000, made up of Rs 3,00,000 extra for the court settlement over the existing provision and Rs 1,00,000 for the fraud that occurred before year end. The proposed dividend is not a liability at the balance sheet date and is only disclosed.

  1. ARs 3,00,000
  2. BRs 4,00,000Correct
  3. CRs 7,00,000
  4. DRs 9,00,000

Explanation

The court settlement confirms a liability existing at the year end, so the additional charge is 5,00,000 - 2,00,000 = 3,00,000. The fraud occurred before the year end and is an adjusting item of 1,00,000, giving 4,00,000. Dividend declared after the balance sheet date is not a liability at that date and is only disclosed, so it is not charged. Including it would give 7,00,000.

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