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

Orion Pharma Ltd prepared accounts for the year ended 31 March 2026, with profit before adjustments of Rs 90 lakh. Before approval of accounts on 30 June 2026, the following came to light: (i) on 12 April 2026 a major customer's claim was settled, requiring Rs 8 lakh more than the provision held at 31 March 2026; (ii) on 20 May 2026 the board proposed a dividend of Rs 25 lakh; (iii) on 5 June 2026 a flood damaged plant, causing an estimated loss of Rs 15 lakh; (iv) on 10 June 2026 inventory valued at Rs 20 lakh at 31 March 2026 was sold for Rs 14 lakh, the fall being due to a defect existing at 31 March 2026. What is the profit after adjusting only for the events required by AS 4?

Adjusted profit is Rs 76 lakh. The claim settlement reduces profit by Rs 8 lakh and the sale of defective inventory below cost reduces it by Rs 6 lakh, both adjusting events. The flood loss is non-adjusting and only disclosed, and the proposed dividend is not recognised as a liability.

  1. ARs 76 lakhCorrect
  2. BRs 68 lakh
  3. CRs 51 lakh
  4. DRs 90 lakh

Explanation

Adjusting events are (i) the settlement, which reduces profit by Rs 8 lakh, and (iv) the sale below cost of inventory with a defect existing at the balance sheet date, which reduces profit by Rs 6 lakh. Adjusted profit is 90 - 8 - 6 = Rs 76 lakh. The flood is non-adjusting and is disclosed only. Under the amended Schedule III treatment the proposed dividend is not a liability at the balance sheet date, so it is not deducted. Deducting the flood loss as well would give Rs 61 lakh, which is incorrect.

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