Park Developers Ltd concentrates on township development. During the past few years it has been selling township
Question:
Park Developers Ltd concentrates on township development. During the past few years it has been selling township property to the public and recognising revenue according to the payment method (profits recognised as payments are received). During the financial year ended 31 December 20.7, legal action was instituted against the company for the return of payments made in connection with property sold in unproclaimed townships. Court cases are pending. The company has rejected any liability for the amount claimed. After year end, but before finalising the financial statements, a court order instructed the company to repay an amount of R8,4 million to buyers. As a result of the court order an amount of R4,2 million included in receivables, will not be collected. The cost of sales of these stands was R1,5 million for land and R2,1 million for development costs. The company proposes to disclose the above matter in a note explaining that a contingent liability exists for the possible repayment that may be required of amounts received for stands in unproclaimed townships. The directors propose to refer to the court order and to the effect that it will have on the statement of profit or loss and other comprehensive income and statement of financial position, in the directors' report under the heading ‘Events after the reporting date’.
Required
a. Briefly discuss the proposed treatment of the court order by the company in terms of the requirements of International Financial Reporting Standards (IFRS).
b. Briefly describe what effect the court order will have on the statement of financial position of the company as at 31 December 20.7. The company makes full provision for development costs when the first stand is sold, but it has agreed to change the balance at year end so that the provision for development costs only applies to stands sold. Your solution must comply with the requirements of International Financial Reporting Standards (IFRS).
Elementary Statistics
ISBN: 978-0538733502
11th edition
Authors: Robert R. Johnson, Patricia J. Kuby