Financial Accounting Theory and Practice

Question 1 -

All Boats Ltd manufactures boats and supplies. The company's current financial year end is 30 June 2016. Its draft financial statements show the following information.

Before the company finalises its financial statements, the following information is provided, assuming each event is independent of each other.

1. On 31 July 2016the directors declare a final dividend of $5 per share.

2. At a directors' meeting held in June 2016, the decision was made to close a division of the business due to decreasing customer demand. The division was closed in August 2016 and the costs amounted to $1.5 million.

3. On 10 September 2016 the directors became aware that the boat engines they had been selling since mid-July 2016 were over-heating and not working during hot weather. The engines were purchased by All Boats on 1 July 2016. By late September 2016 there were numerous claims made against the company by a number of customers.

4. All Boats' main customer was declared insolvent on 10 July 2016. The customer owed All Boats $400 000 as at 30June 2016.

5. In July 2016 the court awarded the company's boats with damages of $500 000. The company's boats took against 2 years ago (2014), against a supplier due to faulty materials being supplied.

Required:

Determine how each of the above events should be disclosed in the company's financial statements for the year ended 30 June 2016.

Identify if each of the events is an adjusting or non-adjusting event, and what accounts will be effected if applicable.

Question 2 -

The following transactions and events relate to Caters Are Us(CAU) Ltd, a small catering business. The company's current reporting year end is 30 June 2016. Assume each event is independent of each other.

1. On 25 July 2016, a competitor launched a catering business that offers better services for cheaper prices. This caused a major decline in business for CAU Ltd. As a result, CAU Ltd has reduced costs and 5 employees lost their jobs on 31 August 2016.

2. On 5 August 2016 a lawsuit was lodged against the company by customers who were poisoned from a catering function delivered by CAU Ltd on 10 July 2016. The customers are claiming $1.5 million in damages. No date has been set for the court hearing.

3. On 20 August 2016, the supply manager discovered that a batch of invoices relating to June 2016 inventory purchases had not been processed. The invoices total $45 000.

4.  On 5 September 2016, the directors resolved to issue to the public 10 000 5% debentures of $8 each, payable $5 on application and $3 on allotment.

5. On 10 September 2016, a flood damages the fruit crop of the company's main supplier. As a result, CAU Ltd had to order fruits from an overseas supplier.

Required:

Determine how each event should be disclosed in the financial statements for the year ended 30 June 2016.

Identify if it is an adjusting or non-adjusting event, and what accounts will be effected if applicable.