Reference no: EM132691168

Lagan Limited prepares its financial statements to 31 December each year. The following issues need to be resolved before the financial statements for the year ended 31 December 2011 can be finalised.

Issue One:

A fire occurred on 12 January 2012 and destroyed Lagan Limited's factory. The best estimate is that it will cost £12 million to rebuild the premises and replace the machinery and inventory destroyed in the fire. The company is insured but due to unusually high levels of inventory the management of the company believe that it will only be able to recover £11.7 million from the insurance company. Lagan Limited's profit after tax for the year ended 31 December 2011 is £24.9 million.

Requirement

Problem 1: Advise the directors of Lagan Limited as to the appropriate accounting treatment for Issue One in the financial statements for the year ended 31 December 2011 if:

(a) Lagan Limited has located alternative premises that it can rent while re-building work is underway and the directors are confident that the company can be fully operational within three weeks of the fire at the new location;

(b) Lagan Limited is able to find alternative premises but it will not be available for at least three months from the date of the fire. Also, due to the highly specialised nature of the machinery used, the manufacturers believe it will be six months before the machinery can be shipped to Lagan Limited's new location.