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

Hindustan Cables Ltd. has a year ending 31 March 2025; accounts were approved on 10 August 2025. Facts: (i) A lawsuit for damages was pending at 31 March 2025, and on 20 June 2025 the court awarded Rs 9,00,000 against the company, where the company had earlier made no provision, believing the claim would fail. (ii) On 2 July 2025, the company issued new equity shares worth Rs 50,00,000. (iii) On 15 July 2025, a major customer's goods sold in February 2025 were returned owing to a defect existing at the time of sale, with sale value Rs 3,00,000 (cost Rs 2,20,000). What is the net reduction in profit for 2024-25 from adjusting events? Ignore tax.

The court award is an adjusting event, reducing profit by Rs 9,00,000. The return of defective goods is also adjusting, reducing profit by the margin of Rs 80,000 (sale Rs 3,00,000 less cost Rs 2,20,000). The share issue is non-adjusting. The net reduction is Rs 9,80,000.

  1. ARs 9,00,000
  2. BRs 9,80,000Correct
  3. CRs 11,20,000
  4. DRs 12,00,000

Explanation

Item (i) is an adjusting event as the suit existed at the balance sheet date: charge Rs 9,00,000. Item (iii): the defect existed at the sale date, so sales return is adjusting; profit falls by the margin, 3,00,000 - 2,20,000 = Rs 80,000 (inventory is restored at cost). Item (ii), share issue, is non-adjusting and only disclosed. Total = 9,00,000 + 80,000 = Rs 9,80,000. Rs 12,00,000 wrongly reverses full sales value.

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