Question # 9J-Mart has distributed its operation in to four Divisions i.e. Food, Furniture, Clothing andHousehold Appliance. The following information has been extracted from the records:1. The company allows the dissatisfied customers to return the goods within 30days. It is estimated that 5% of the sales made in June 2008 will be refunded in July2008.2. On June 2, 2008, three employees were seriously injured as a result of a fire at thecompany’s warehouse. They have lodged claims seeking damages of Rs. 2.0 million fromthe company. The company’s lawyers have advised that it is probable that the court mayaward compensation of Rs.400, 000.3. Under a new legislation, the company is required to fit smoke detectors at all thestores by December 31, 2008. The company has not yet installed the smoke detectors.4. On June 20, 2008, the board of directors decided to close down the HouseholdAppliances Division. However, the decision was made public after June 30, 2008.5. The company has a large warehouse in Lahore which was acquired under a three-year rent agreement signed on April 1, 2007. The agreement is non cancelable andcompany cannot sub-let the warehouse. However, due to operational difficulties, thecompany shifted the warehouse to a new location.6. A 15% dividend was declared on July 5, 2008.Required: How the above be dealt in the FS for the year ended Jun 30, 2008

The above situations would be dealt with in the Financial Statements (FS) for the year ended June 30, 2008 as follows:

1. The estimated 5% of sales to be refunded in July 2008 should be recognized as a liability in the FS for the year ended June 30, 2008. This is because the obligation arose in June 2008 when the sales were made.

2. The probable court compensation of Rs.400,000 should be recognized as a provision in the FS for the year ended June 30, 2008. This is because it is a present obligation as a result of a past event (the fire), it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.

3. The requirement to fit smoke detectors does not need to be recognized in the FS for the year ended June 30, 2008. This is because it is a future obligation that will arise only after the FS date.

4. The decision to close down the Household Appliances Division does not need to be recognized in the FS for the year ended June 30, 2008. This is because the decision was made public after the FS date.

5. The non-cancelable rent agreement for the Lahore warehouse should be recognized as a lease liability in the FS for the year ended June 30, 2008. This is because the company has an obligation to make lease payments for the remaining term of the lease, even though it has shifted to a new location.

6. The 15% dividend declared on July 5, 2008 does not need to be recognized in the FS for the year ended June 30, 2008. This is because the obligation to pay the dividend arose after the FS date.