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

Kaveri Engineering Ltd. has a year-end of 31 March 2026. Accounts were approved on 25 June 2026. A customer, Rathi Traders, owed Rs 6,00,000 at 31 March 2026, against which the company had made no provision. On 10 May 2026 Rathi Traders was declared insolvent and the company estimates it will recover only 25% of the dues from the official assignee. What amount should be charged to the Statement of Profit and Loss for 2025-26 on account of this?

Rs 4,50,000 should be charged. The customer's insolvency after the year-end provides evidence of a condition existing at 31 March 2026, so it is an adjusting event. Expected recovery is 25% of Rs 6,00,000, i.e. Rs 1,50,000, leaving a loss of Rs 4,50,000 to be recognised in 2025-26.

  1. ARs 1,50,000
  2. BRs 4,50,000Correct
  3. CRs 6,00,000
  4. DNil, with disclosure only

Explanation

Insolvency after the year-end confirms the customer's poor financial condition existing at the balance sheet date, so it is an adjusting event. Expected recovery is 25% of 6,00,000 = 1,50,000, so loss = 6,00,000 - 1,50,000 = 4,50,000. Rs 1,50,000 is the recovery, not the loss, and writing off Rs 6,00,000 ignores the expected recovery.

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