Question
Wrenhollow Engineering's year ends on December 31, 2026 and its financial statements are authorised for issue on March 15, 2027. These events happened in between:
- (a) January 20: a customer that owed $40,000 at year end went into bankruptcy. The customer had been in financial difficulty since November.
- (b) February 5: a lawsuit outstanding at year end was settled for $75,000. Wrenhollow had provided $60,000 at December 31.
- (c) February 10: a fire destroyed inventory costing $90,000 in the main warehouse.
- (d) March 1: the directors declared a dividend of $50,000.
Required:
- Adjusting Entries — the entries to record in the 2026 financial statements. Use Bad Debt Expense, Accounts Receivable, Litigation Expense and Provision for Litigation.
- Disclosure — which events are disclosed in the notes but not adjusted for.
- Statement Impact — the combined effect of your adjustments on the 2026 statements.
Statements in this challenge
- Adjusting EntriesJournal 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