Question

Question 1 Blenkinsop Ltd has prepared its financial statements for the year ended 30th June 2019. The following events have taken place.

(a) On 28th July 2019, during a cyclone, flooding took place which damaged a warehouse. As a result of the flood inventory with a cost of $472,800 was destroyed. The warehouse equipment will require a major repair which will cost $725,000.

(b) On 12thAugust 2019, Grouse Ltd, which was a large customer of Blenkinsop Ltd, announced that it was in future going to source all of its material from an offshore supplier in Thailand. Grouse Ltd currently had a zero balance in accounts receivable.

(c) On 18th August 2019, on the advice of its lawyers, Blenkinsop Ltd settled a negligence claim which had arisen when a customer sued the company for damages. This arose from injuries suffered when one of Blenkinsop Ltd’s employees had crushed their foot with a forklift truck. The incident took place at the Darwin distribution hub on 15th March 2019.

(d) On 30th June 2019, Dastardly Ltd owed Blenkinsop Ltd $329,648. On 14th July 2019, Blenkinsop Ltd received a letter from Dastardly Ltd’s administrator that the company had become insolvent. Blenkinsop Ltd stopped all trading at the end of April 2019.

Required: Describe, giving detailed explanations and references to the appropriate accounting standard where relevant, how Blenkinsop Ltd should treat the above events when completing the financial statements for the year ended 30th June 2019.

Answer 1

1. In this case cyclone destroyed whole warehouse along with stock and require heavy repair which is certain now so company should immediate make the provision in books and Management should show this in Provisions and Contigency block of the Annual report as per accounting standards.

2. This is a loss of future income which is not required to be mentioned in Accounting report instead of that discussed within internal meetings of the company

3. This is an expense which pertains to previous year because incident related to previous year and probability was also exist to pay penalty and now confirmed from Lawyer so will be included in expense and in notes to accounts

4. This is a demolition of assest which has been confirmed by insolvency news so that will be transferred to P&L as per accounting standard