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Tutorial 12

Jane Lazar and Huang (4th Edition)-


Chapter 19-MFRS 110
Question 3
page 354
Winnies current year-end was 31 March x9. Its financial statements were authorised for issue by
its directors on 6 May x9 and the annual general meeting will be held on 3 June x9. The following
matters have been brought to your attention.
a) On 12 April x9, a fire completely destroyed the companys largest warehouse and the
inventory it contained. The carrying amounts of the warehouse and the inventory were
RM10 million and RM6 million, respectively. It appears that the company has not updated
the value of its insurance cover and only expects to be able to recover a maximum of RM9
million from its insurers. Winnies trading operations have been severely disrupted since
the fire and it expects large trading losses for some time to come.
b) A single class of inventory held at another warehouse was valued at its cost of RM460,000
at 31 March x9. In April x9, 70% of this inventory was sold for RM280,000 on which
Winnies sales staff earned a commission of 15% as at 31 March x9.
c) On18 May x9, the government announced tax charges which have the effect of increasing
Winnies deferred tax liability by RM650,000 as at 31 March x9.

Required:
Explain the required treatment of the above items by Winnie in its financial statements for the
year ended 31 March x9.
(a)
This is normally classified as non-adjusting event as there is no
reason to doubt that the value of the warehouse and the inventory
it contained was worth less than its carrying amount at 31 March
x9. The total loss suffered is RM16 million but the entity expects to
recover RM9 million of this loss. As this event has caused serious
disruption to trading, there should be disclosure by way of note of
details of the non-adjusting events and the effects of the recovery
from the insurers.
Recoveries from third parties have to be reviewed separately.
The going concern status of the entity is questionable due to
disruption of trading and projected operating losses. If Winnie is
assesses as to be no more a going concern, then the fire and the
consequences become adjusting events requiring the financial
statements to be redrafted and prepared on a liquidation basis.
(b)
The 70% of the inventory amounting to RM322,000
(RM460,000 x70%) was sold for net amount of RM238,000
(RM280,000 x85%). A large portion was sold after the year-
end at a loss. The sale price is an evidence of the net
realisable value as at the balance sheet date. Therefore, it is
an adjusting event. The carrying value of the inventory should
be written down by RM120,000 to its net realisable value of
RM340,000. It is unlikely that the fall in value of the inventory
could be due to events after the balance sheet date.

70% x cost = RM238,000


Cost = RM340,000
Original cost = RM460,000
Therefore, the different is RM120,000
(c)
Date of announcement of tax rate change is
beyond the period of consideration in
MFRS110. It is a non-adjusting event.

*Authorised for issue by its


directors on 6 May x9
**The government announced tax
charges on 18 May x9