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

Rao Industries Ltd. closes its books on 31 March 2026; accounts are approved on 28 May 2026. Profit before considering the following was Rs 90 lakh. (i) On 10 April 2026, a customer's goods sold in March 2026 were returned as defective; the sale was Rs 6 lakh at a cost of Rs 4 lakh, with an indication that the defect existed at the date of sale. (ii) On 5 May 2026, the Board proposed a dividend of Rs 15 lakh. (iii) On 12 May 2026, a major plant was destroyed in a flood, with an estimated loss of Rs 20 lakh. Ignoring tax, what is the adjusted profit for 2025-26?

Adjusted profit is Rs 88 lakh. Only the sales return is an adjusting event, reducing profit by the Rs 2 lakh margin (Rs 6 lakh sale less Rs 4 lakh cost recovered in stock). The proposed dividend and the flood loss arose after the year end and are only disclosed, not adjusted.

  1. ARs 88 lakhCorrect
  2. BRs 70 lakh
  3. CRs 68 lakh
  4. DRs 73 lakh

Explanation

Only (i) is an adjusting event, as the return confirms a defect existing at the sale date. Reversing the sale reduces profit by sale value less cost of returned stock: 6 - 4 = 2 lakh, so profit is 90 - 2 = 88 lakh. The dividend proposed is not a liability at the balance sheet date under AS 4 and is only disclosed, and the flood is a non-adjusting event, so both are disclosed only. Deducting the 20 lakh flood loss gives the trap figure of 70 lakh (or 68 lakh with the return as well).

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