(a) Consider the following list of events that occurred between 31st December 2016(reporting date) and 31st March 2017 (date of authorization of financial statement for issue) and decide which one you would classify as adjusting events and which are non-adjusting events. You should also state clearly the treatment that you are proposing in each case.
(i) The receipt of net proceeds of sales TZS 12.600,000 for inventory items whose net realizable value was estimated (31st December 2016) at 12,000,000 and cost was TZS 12,500,000.
(ii) Proposed dividend made by the director’s board meeting on 31st January2017, for a total of TZS 160,000,000,000.
(iii) Enactment in February 2017 of a new customer protection law that requires the company to enhance disclosures in labels on its products (including translating them in Kiswahili language). This, apart from increasing labeling costs, makes labels costing the company TZS. 14,000,000 useless.
(iv) The declaration of bankruptcy for a debtor. An allowance of TZS 15,000,000 was set against his doubtful debt at 31st December 2016. The total amount receivable before the allowance was TZS.42,000,000 and as a result of the bankruptcy declaration directors estimate that only TZS 12,000,000 can be recovered.
(V) The chairman of the board of directors got appointed on 1st January 2017 as a member of parliament (by the president). The appointment automatically requires him to relinquish her position as board member and chair. Processes to fill her position in the board are estimated to cost TZS.15,000,000.
(b) Gambini Company is preparing its Financial Statements for the year ended 31st December 2016.
The following matters are all outstanding at the year end.
(i) Gambini is facing litigation for damages from a customer for the supply of faulty goods on 1st December 2016. The claim which is for TZS 500,000,000, was received on 15th January 2017. Gambini’s legal advisors consider that Gambini is liable and it is likely that this claim will succeed. On 25th January 2017, Gambini sent a counter-claim to its suppliers for the TZS.4000,000,000.Gambini’s legal advisors are unsure whether this claim will succeed.
(ii) Gambini’s sales director, who was dismissed on 15th December 2016, has lodged a claim for TZS 100,000,000 for unfair dismissal. Gambini’s legal advisors believe that there is no case to answer and therefore think it is unlikely that this claim will succeed.
(iii) Although Gambini has no legal obligation to do so, it has habitually operated a policy of allowing customers to return goods within 28 days, even where those goods are not faulty. Gambini estimates that such returns usually amount to 1% of sales. Sales in December
2016 were TZS 400,000,000. By the end of January 2017,prior to the drafting of te financial statements, goods sold in December for TZS 3,500,000 had been returned.
(iv) On 15th December 2016 Gambini announced in the press that it is to close one of its divisions in April 2017. A detailed closure plan is in place and the costs of closure are reliably estimated at TZS 300,000,000, including TZS 50,000,000 for staff relocation.
State with reasons, how the above matters should be treated in Gambini’s financial statements for the year ended 31st December 2016.