Question

JANUARY 2019. QUESTIONS Urban plc, a company that prepares its a company that prepares its financial statements to 31 December cach year involved in the construction and repair of city centre student accommod e r of inancial statements for the year ended 31 December 2018 can be finalised, outstanding issues need to be resolved. outstanding icments for them and repair of ancial staten need to be resor ended 31 Decennice stude ntre student accommodation. Before the succesusly and Urbcontract. The cotember 2018 had noction againse Urbi Issue 1: In early January 2019, a customer com y, a customer commenced legal action against Urban plc alleging construction work completed in September 2018 had not been carried out in terms of the contract. The directors of Urban plc intend to defend the allegation Borously and Urban ple's legal adviseurs estimate that the company has an 75% chance Successfully defending the claim. If the customer is successful, penalties and legal fees are expected to amount to £1.500.000. If Urban plc wins the case, non-recoverable legal fees of U will have been incurred. The directors of Urban ple are proposing to omit reierende to the legal action in the financial statements for the year ended 31 December 2018 as the w was not issued until January 2019. £65,000 will amount to £1,500,000 the customer is succes company has an 4 Marks Issue 2: Urban plc was informed on 6 January 2019 that one of its major customers, Unibed Limited, had gone into liquidation. The liquidator indicated that no payments would be made to unsecured creditors. The amount owed by Unibed Limited to Urban ple on 6 January 2019 amounted to E100,000, of which £60,000 related to work completed on 21 December 2018 and £40,000 to work commenced and completed during the first week of January 2019. 6 Marks Issue 3: During 2018, there was unrest amongst Urban ple's construction workers following changes to their terms and conditions of employment, with the directors of Urban ple seeking to make 20% of the workforce redundant. On 6 January 2019, following protracted negotiations, it was agreed that 12% of the workforce would be made redundant at a cost of £400,000. 4 Marks Issue 4: As the profits of Urban ple for the year ended 31 December 2018 exceeded expectations, the directors wish to reward the ordinary shareholders for their commitment to the company. At a meeting of the Board of Directors on 5 January 2019 it was decided that a dividend of £500,000 be paid immediately to the ordinary shareholders and accounted for in the financial statements for the year ended 31 December 2018. 5 Marks Issue 5: During 2018, Urban plc purchased freehold land that is currently stated at its cost of £1,000,000 in the financial statements for the year ended 31 December 2018. The directors do not wish to depreciate the land in 2018 but are willing to do so in future years. 4 Marks

Answer 1

Issue 1: Contingent Liability is a liability that may occur or not occur depending on the uncertain future events. If this amount is estimated, then it will be shown as Contingent Liability in the Notes of Accounts referring to the Financial Statements. It will never be reflected in the Balance Sheet of the company. Only it will required to be disclosed in notes.

Referring to this legal case against Urban plc ,I can conclude that the outcome of this legal case is uncertain where Company will win/lose the case. So, here the pending case along with the contingent Liabilities of 15,00,000 will be required to be disclosed in the notes to accounts at the time of preparation of Financial Statements of the company for the year ended 31st December,2018 as the case had been filed in September,2018. So,the Director's proposal regarding omitting the reference of the legal case in the financial statements for the year ended 31/12/2018 is not valid stating the writ clause.

Issue 2: As per the respective Accounting Standards, for the events occurring after the Balance Sheet Date of the Financial Statements, are needed to be categorized in to Adjusting and Non Adjusting Events. Adjusting Events provide sufficient conditions existing at the Balance Sheet Reporting Date and it will result into adjustments in the Financial Statements.

Whereas Non adjusting events do not have any conditions exist at the reporting period and not to be adjusted in the financial statements.

Referring to the sum,due from major customer relating to the work executed till 31st December,2018 is 60,000 and remaining 40,000 is relating to the next accounting period. So,if the liquidation condition of this customer exist in the Balance Sheet Reporting Date that is 31st December,2018,and in January 2019 it is declared as liquidated ,then Provision Bad Debt of 60,000 is required to adjusted in the Profit and Loss /Revenue Account and such provision is needed to be deducted from Gross Debt Receivable Balances in Balance Sheet for the year ended 31/12/2018.

However in absence of conditions existing on 31/12/2018,such provision for bad debt can not be adjusted in the financial statements for the year ended 31/12/2018 and no effect is to be given in the current reporting period.

Issue 3 :

Employee termination costs are recognized when the company can not revoke their offer of termination benefits or the employee accepts such termination agreement,terms and conditions and it is generally recognized mainly before payment of such benefits.

Here since, the date of the decision to termination/agreement is 06th January,2019 that is not within year-end 31/12/2018, no accrual is to be required at 31st December,2018. But If the decision to terminate the employee is made within Dec. 31, 2018, then the full amount of the termination benefit amounting to 4,00,000 is to be debited and accrued termination benefit of 400000 is to be credited and as a result in Current/Non-Current Liabilities, such accrued termination benefit is to be reported for the year ended 31st December,2018.

Issue 4 : If dividends are declared after the end of the Reporting Period, but before the approval of financial statements by the Board of Directors, then the dividends being non adjusting events,are needed to be disclosed in the notes to the financial statements.Non adjusting events do not have any conditions exist at the reporting period and not to be adjusted in the financial statements.

Referring to the sum,as dividend was declared after the Reporting Period that is January,2019 ,so it is only to be disclosed in the notes as per the respective Accounting Standards, relating to the events occurring after the Balance Sheet Date of the Financial Statements ended 31st December,2018. If it was declared in the year 2018,then it is going to be credited as Proposed Dividend and Revenue Account is to be debited and in the Balance Sheet,such Proposed Dividend is shown under Current Liabilities.

Issue 5: Such Freehold Land costing 10,00,000 is to be reflected under non depreciated fixed assets in the Balance Sheet for the year ended 31st December,2018. As land having infinite useful life, is never depreciated in the Books of Accounts. So,Management's decision to depreciate such land in future years is not valid. It is only disclosed under Fixed Assets and respective cash account will be credited. Being capital expenditure in the year 2018, it is not reflected in the Revenue Account , rather to be disclosed in the Balance Sheet for the year ended 31/12/2018.