Question 3 (5 marks)

Southern Ltd. (Southern) prepares its financial statements in accordance with IFRS. After the year ended December 31, 2020, but before the financial statements were issued, the following events occurred:

• One of Southerns customers, who had an outstanding accounts receivable balance of $150,000 at year end, declared bankruptcy and agreed to pay Southern only 35% of the year-end balance owing.
• Southern disposed of equipment that was NOT being used in operations at a selling price below the current book value. This resulted in a loss on disposal of $150,000.
• Southern settled litigation at $100,000 more than the provision recorded in the accounts at year end.
• A heavy rainfall caused a flood that damaged inventory which was valued at

$120,000 at the year-end date.

Required:

1. Describe in general terms the two categories of subsequent events. (1 mark)
2. Describe in general terms how each of the two categories of subsequent events should be accounted for. (2 marks)
3. For each event described above that impacted Southern, identify which category of subsequent events applies and whether an adjustment is required to Southerns financial statements for the year ended December 31, 2020. (2 marks)