Question
Varnholt Chemicals is finalising its financial statements for the year ended December 31, 2026. Four matters are outstanding:
- A. A neighbouring farm has sued for crop damage caused by a chemical leak in 2026. Lawyers consider it probable that Varnholt will have to pay. The settlement is estimated at between $80,000 and $120,000, with every amount in that range equally likely.
- B. Varnholt has guaranteed a supplier's $50,000 bank loan. The supplier is struggling, and a call on the guarantee is possible but not probable.
- C. Varnholt is suing a contractor over faulty equipment. Lawyers think it is probable, but not virtually certain, that Varnholt will be awarded about $70,000.
- D. In December the board decided to close a regional depot in 2027. No detailed plan has been drawn up and nobody outside the board has been told.
Required:
- Journal Entry — record every entry required at December 31, 2026. Use Litigation Expense and Provision for Litigation. Record nothing for a matter that is not recognised.
- Disclosure — identify which of the other matters are disclosed in the notes without being recognised.
- Statement Impact — the combined effect of Varnholt's year-end accounting for all four matters.
Statements in this challenge
- Journal EntryJournal Entry
- DisclosureMCQ Quiz
- Statement ImpactStatement Impact
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
How to approach this
IAS 1 — Presentation of Financial Statements
A composite challenge links several statements built from one set of data, so figures flow between them: profit reaches retained earnings, and the closing balances feed the position statement. Complete them in the order the statements depend on each other rather than the order of the tabs.
Common mistakes
- Preparing each statement independently, so the linking figures disagree.
- Carrying a figure forward before finishing the adjustments that change it.
- Reworking a linked figure in one statement without updating it in the others.
Further readingIAS 1: what goes where in a full set of statements