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

Tapti Ceramics Ltd. prepared its accounts for the year ended 31 March 2026 showing profit before tax of Rs 40 lakh before considering the following. Accounts were approved on 10 July 2026. (i) On 20 April 2026 the Board proposed a final dividend of Rs 5 lakh. (ii) On 30 April 2026 a major customer's insolvency was declared; Rs 3 lakh of its dues at year-end were unprovided and are irrecoverable. (iii) On 15 May 2026 a flood damaged plant worth Rs 7 lakh. (iv) On 1 June 2026 the company received an arbitration award requiring it to pay Rs 2 lakh for a 2025-26 delivery dispute, previously unprovided. What profit before tax should be reported for 2025-26?

Profit before tax is Rs 35 lakh. Only the customer's insolvency (Rs 3 lakh) and the arbitration award (Rs 2 lakh) are adjusting events, totalling Rs 5 lakh. The proposed dividend and the flood damage are non-adjusting items that are disclosed, not charged, so Rs 40 lakh less Rs 5 lakh gives Rs 35 lakh.

  1. ARs 35 lakhCorrect
  2. BRs 30 lakh
  3. CRs 23 lakh
  4. DRs 33 lakh

Explanation

Adjusting items are (ii) Rs 3 lakh and (iv) Rs 2 lakh, total Rs 5 lakh. Profit = 40 - 5 = 35 lakh. The proposed dividend is not a liability at the balance sheet date and is only disclosed, while the flood is a non-adjusting event. Deducting the flood (7) as well gives 28 lakh, which would be wrong, and deducting dividend too is also wrong.

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