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

Mehta Engineering Ltd. has a year ending 31 March 2025 and its accounts were approved on 25 June 2025. A customer, Sharma Traders, owed Rs 6,00,000 at year end and Mehta had made no provision. On 10 May 2025 Sharma was declared insolvent and the official assignee indicated that only 25% of the debt would be recoverable. Profit before this item was Rs 40,00,000. What is the profit for 2024-25 after the correct treatment?

The customer's insolvency after year end provides evidence of conditions existing at the balance sheet date, so it is adjusting. Only Rs 1,50,000 is recoverable, giving a loss of Rs 4,50,000, and profit falls from Rs 40,00,000 to Rs 35,50,000.

  1. ARs 40,00,000, since the event occurred after the balance sheet date
  2. BRs 34,00,000
  3. CRs 38,50,000
  4. DRs 35,50,000Correct

Explanation

Insolvency of a customer after the balance sheet date confirms that the debt was already impaired at year end, so it is an adjusting event. Recoverable amount is 25% of 6,00,000 = 1,50,000, so loss is 4,50,000. Profit = 40,00,000 - 4,50,000 = 35,50,000. Option B writes off the full debt, ignoring the expected recovery.

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