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ACCA Applied Knowledge · Financial Accounting · Events after the reporting period

Kestrel Co has a year-end of 31 December 20X5 and the financial statements were authorised on 15 March 20X6. A receivable of $40,000 at 31 December 20X5 was unprovided. On 20 February 20X6 the customer was declared insolvent and Kestrel expects to receive nothing. Kestrel's profit before this adjustment was $300,000. What is the correct profit after dealing with this event?

Profit is $260,000. The customer's insolvency on 20 February is an adjusting event, confirming the debt was irrecoverable at the year-end, so the $40,000 receivable is written off as an expense, reducing profit from $300,000 to $260,000.

  1. A$300,000
  2. B$260,000Correct
  3. C$340,000
  4. D$220,000

Explanation

The insolvency confirms the receivable was irrecoverable at the reporting date, so it is an adjusting event. Write off $40,000: 300,000 - 40,000 = 260,000. Leaving profit unchanged would treat it as non-adjusting, which is wrong here.

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