Question: Zero Growth Limited has completed financial statements for the year

Zero Growth Limited has completed financial statements for the year ended 31 December 20X6. The financial statements have yet to be finalized or issued. The following events and transactions have occurred:
a. The office building housing administrative staff burned to the ground on 15 January 20X7.
b. On 15 November 20X6, a customer sued the company for $ 1,000,000 based on a claim of negligence leading to personal injury; Zero Growth is actively defending the suit and claims it is unfounded. Nothing has yet been recorded in the 20X6 financial statements in relation to this event.
c. On 1 February 20X7, Zero Growth received a $ 49,700 income tax reassessment for 20X5.
d. On 20 December 20X6, Zero Growth applied for a bank loan to replace an existing line of credit. The loan was granted on 2 January 20X7. This event was not recorded in 20X6 or reported in the draft 20X6 financial statements.
e. Zero Growth has reinterpreted a legal agreement entitling it to commission revenue for the sale of a client’s products. Zero Growth’s interpretation would entitle it to an extra $ 60,000 over and above amounts recognized in 20X6. The amount has not been recorded in the accounts. The client was billed for this amount in 20X6 but has disagreed with Zero Growth on the contract interpretation. Both parties have consulted their lawyers; resolution of the issue is not expected soon.
f. On 1 March 20X7, Zero Growth issued new common shares for cash. The new issue increased the total number of shares outstanding by 20%.

Discuss the appropriate accounting treatment for the contingencies and subsequent events described.

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  • CreatedFebruary 17, 2015
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