Question 2

A. Consumer Plus Ltd is a supermarket and is facing litigations regarding a defective product sold to a customer. The company was told by its lawyers that is it likely to have to pay $100,000 in damages to that customer. A provision was set up as at 31 December 2017. However, the following year, the lawyers found that the damages were more likely to be $500,000.

i. Prepare the double-entry and extract from the financial statements to show how the provision is to be treated and disclosed in the accounts as at:

1. 31 December 2017

2. 31 December 2018 (8 marks)

ii. Explain the rationale underlying the accounting treatment for each year. (1 mark)

B. During 2018, SuperPlus Ltd discovered that certain items valued at $4.2m had been included in inventories at 31 December 2017, and in fact these items were sold before the year end. The draft figures (extract) below were provided for you:

20172018

$000 $'000

Sales 47,400 67,200

Cost of goods sold (34,570)(55,800)

Profit before taxation 12,83011,400

Income taxes (3,880)(3,400)

Net profit 8,950 8,000

Other relevant information extracted from the accounting records:

1. Retained earnings at 1 January 2017 were $13m

2. The cost of goods sold for 2017 includes the $4.2m error in opening inventory

3. The income tax rate was 30% for 2017 and 2018

Required:

i.Prepare a detailed income statement for 2018 with 2017 comparative. (3 marks)

ii.ii. Calculate the retained earnings for both years (2 marks)

C. Based on the Consumer Plus Ltd scenario, distinguish between adjusting and non-adjusting events based on IAS 10 Events after Balance Sheet date and in relation to IAS 37 Provisions, contingent liabilities, and contingent assets. (5 marks)

(Total 20 marks