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

Mehta Components Ltd. has a year end of 31 March 2026. A customer, Sharma Traders, owed Rs 6,00,000 at that date, and the company had made no provision. On 22 April 2026, before the accounts were approved, Sharma Traders was declared insolvent and the company expects to recover only 25% of the dues. What adjustment is required in the 2025-26 accounts?

A bad debt of Rs 4,50,000 must be provided. The customer's insolvency after year end confirms a condition existing at the balance sheet date, so it is an adjusting event. With 25% (Rs 1,50,000) recoverable, the loss is Rs 6,00,000 minus Rs 1,50,000.

  1. ANo adjustment; only disclosure
  2. BProvide for bad debt of Rs 1,50,000
  3. CProvide for bad debt of Rs 4,50,000Correct
  4. DWrite off Rs 6,00,000 fully

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 the loss is 6,00,000 - 1,50,000 = 4,50,000. Option B wrongly uses the amount recoverable as the loss.

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