Reference no: EM132917793

After the end of the reporting period, prior to authorizing for issue the financial statements of Chubby the Piggy Ltd for the year ended 31 March 20X7 the following issues were raised:

1. The notification of the bankruptcy of a customer: The balance of trade receivables due from the customer on 31 March 20X7 was $23,000 and at the date of the notification it was $25,000. No payment is expected from the bankruptcy proceedings.

2. Sales of some items of product ChoCoCo were made at a price of $5,40 each in April and May 20X7. Sales staff receives a commission of 15% of the sales price on these products. On 31 March 20X7 the company had 12,000 units of this product in inventory included at a cost of $6 each.

3. The company is being sued by an employee who lost a limb in an accident while at work on March 15 20X7. The company is contesting the claim as the employee was not following the safety procedures that he had been instructed to follow. Accordingly, the financial statements include a note of a contingent liability of $500,000 for personal injury damages. In recently decided cases where a similar injury was sustained, a settlement figure of $750,000 was awarded by the court. Although the injury was similar the circumstances of the accident in the decided case, were different from those in the Chubby the Piggy Ltd case.

Required:

Problem a. State and quantify how the above items should be treated when finalizing the financial statements of Chubby the Piggy Ltd for the year ended 31 March 20X7.

Problem b. Explain why there is a need for Accounting Standard 37 Provisions, contingent assets, and contingent liabilities. Illustrate your answer with three practical examples of how the standard addresses controversial issues.