Reference no: EM13498124

Events after the reporting period

Bob Ltd is finalising its financial statements for the reporting period ending 30 June 2014. On 21 July 2014, before the financial statements have been finalised and authorised for issue, the company's directors became aware of the following situations:

a) 2 July 2014: The directors proposed a dividend of $10,000.

b) 3 July 2014: The directors approved the sale of an off-shore agency to another entity for a profit of $30,000.

c) 4 July 2014: The company received an invoice from a supplier for $85,000 for goods delivered in June; the goods were included in closing inventory at an estimated cost of $100,000.

d) 5 July 2014: The company executed a guarantee in favour of the banks for an outstanding loan of $1,000,000 that the bank made to X Ltd, the company's major supplier, in January of that year; the guarantee was executed because the bank was demanding payment, which would have disrupted inventory supplies.

e) 6 July 2014: An agreement was signed to take over a production facility in Adelaide at a cost of $5,000,000, which will be paid for using a long-term finance lease.

f) 7 July 2014: The Australian Taxation Office waived fines for the inclusion of incorrect information in the company's 2012 income tax return; the adjusted return was reflected in the company's financial statements and the fine of $30,000 was recognised as an expense and liability at reporting date.

Required:

i) Given that financial statements are prepared for the financial period up to the reporting date, explain why there is a need for a standard that refers to events occurring after the reporting date.

ii) Explain whether the above events will be classified as either adjusting or non-adjusting events after the end of the reporting period (assuming the amount is material), providing reasons for your decision. State the appropriate accounting treatment for each event in Bob Ltd's 2014 financial statements.

(Source: Adapted from Deegan, C. (2010). Australian financial accounting. (6th edition) Sydney: McGraw Hill.)