Question

Part A: (8 Marks)

The 31 December 2018 financial statements of Grape Ltd have been prepared in draft form. However, the accounts have not yet been printed and sent to shareholders. Subsequent to reporting date, the following events occur:

1. On 20 January 2019, the directors recommend a final dividend of $2 per share.
2. The company received an invoice from a supplier for $85,000 on 25 January 2019 for goods delivered in December 2018. The goods were included in closing inventory at an estimated cost of $100,000.
3. On 31 January 2019, the Remuneration Committee determined the CEO’s bonus for the year ended 31 December 2018 as $3,000,000; the manager is entitled to an annual bonus based on company profits as determined by Remuneration Committee. No accrual has been made.
4. On 5 February 2019, the company executed a guarantee in favour of the banks for an outstanding loan of $1,000,000 that the bank made to Season Ltd, the company’s major supplier, in December 2018. The guarantee was executed because the bank was demanding payment, which would have disrupted inventory supplies.

Required:

Assume all amounts are material for accounts purposes. For each of the above events state whether adjustment or disclosure is required in the 31 December 2018 financial statements. If adjustment is required, state the nature of the adjustment, that is the effect on elements of the financial statements.                                                                                                      [8 marks]

Answer 1

Event Recommendation of final dividend by the directors Adjustment is required to be made in the financial statements The nature of adjustment is by providing for proposed dividend in the liabilities side by adjusting the profits earned. Such proposed dividend is not a current liability but a provision, which becomes a current liability when it is approved by the shareholders in the AGM. Receiving invoice from a supplier on 25 January 2019 for goods delivered in December 2018. Adjustment is required for the above event in the books of accounts as the goods were already delivered in December 2018, i.e. year 2018 and properly accounted for in the closing inventory even though the invoice has been received in the next year. The nature of this adjustment is by means of including CSle he above supplier in the amount of suppliers' balance on 31/12/2018.

Determination of annual bonus of the CEO as determined by the Remuneration Committee Adjustment is required for the above event in the books of accounts for the year 2018 because even though the determination of such bonus is done in the next year but in reality, it pertains to the services provided by CEO in the year 2018. The above treatment Is recommended in order to comply with the accrual and matching principle of accounting. The adjustment should be done by increasing the expenses by the amount of such bonus thus, leading to a decrease in the net profits of the year 2018 Execution of guarantee (CNo adjustment is required for this event, however, only a disclosure is considered sufficient.