Question

An earthquake destroyed a warehouse of Aco Ltd on 20.5.2018. The accounting year of the company ended on 31.3.2018. The accounts were approved on 30.6.2018. The loss of goods stored in warehouse is estimated at Rs. 12 lakhs. State with reason, whether the loss is adjusting or non-adjusting event. 5. A company had replaced a semi-automatic part of a machine worth Rs. 25,000, which has doubled the output of the machine. How this cost of semi-automatic part is to be treated?

ANSWER THIS QUESTION WITH ACCOUNTING STANDARDS​

Answer 1

Answer:

ans is right which is above

Answer 2

In the first case, the loss is not an adjusting event, whereas in the second case the cost of the part will be ascertained as per AS 10.

a)

• As per AS 4, "Contingencies and Events Occurring after the Balance Sheet Date, Adjustments to assets and liabilities are not suitable for events happening after the balance sheet date.
• On the balance sheet date of 20.5.2018, the warehouse destruction caused by the earthquake occured. Thus, earthquake related loss won't be recognised during the 2018–2019 fiscal year.
• However, extraordinary developments impacting firm's existence after balance sheet date may suggest considering the fundamental accounting assumption of going concern when preparing the financial statements, as stated in paragraph 8.6 of the standard.
• In evidence in the inquiry, the earthquake caused significant damage; thus, the fundamental accounting assumption of going concern is required. The Report of the Directors for the financial year 2018–2019 shall reveal the fact of the earthquake as well as an expected loss of Rs. 12 lakhs.

b)

• Property, plant, and equipment are under Accounting Standard 10. According to this accounting standard, the asset will be recorded in the books of accounts in a certain way.
• Any asset will only be recognised when it is likely that it will bring the business future financial benefits and when its cost can be accurately determined.
• The costs that follow are recorded in the profit and loss statement on a daily basis. Replacement parts are only recognised when the requirements for recognition are satisfied; obsolete parts are not recognised.

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