03 August 2010
A company closed accounting year on 30-6-2001.It was engaged in laying pipeline for an oil company, deep beneath the earth.While doing the boring work on 1-9-2001,it had met a rocky surface for which it was estimated that their would be extra cost to the tune of Rs.80lakhs which would not be recoverable from the oil company.How it would be dealt with in the financial statements for the year ended 30-6-2002? Would Rs.80lakhs be disclosed as prior period item?
a) is that company has continued work through the rocky surface, b) how the cost has been shown in the year in which the work has been done. c) how the same has been carried till this year.
with out the above details it would be inappriate to expect an answer.
14 July 2024
In this scenario, the extra cost of Rs. 80 lakhs incurred due to encountering a rocky surface while laying the pipeline deep beneath the earth on 1-9-2001 should be accounted for as follows:
### Treatment in Financial Statements for the Year Ended 30-6-2002:
1. **Recognition of Extra Cost:** - The additional cost of Rs. 80 lakhs should be recognized as an expense in the financial year ending 30-6-2002. - This expense represents an unexpected cost incurred in that financial year directly related to the project.
2. **Accounting Treatment:** - Debit: Expense Account (e.g., Extra Cost Incurred Account) - Credit: Cash/Bank Account or Accounts Payable (depending on when the payment is made)
3. **Disclosure in Financial Statements:** - The Rs. 80 lakhs should be disclosed in the financial statements for the year ended 30-6-2002 as a specific item in the statement of profit and loss (income statement). - It should not be disclosed as a prior period item because it relates to the current financial year (2001-2002), specifically incurred after the year-end of 30-6-2001.
### Explanation:
- **Nature of the Cost:** The Rs. 80 lakhs represents an additional cost incurred due to unforeseen circumstances encountered during the ongoing project. It is not a prior period item because it relates to events after the year-end date of 30-6-2001.
- **Treatment in Financial Statements:** Since the cost was incurred during the financial year ending 30-6-2002, it should be recognized in that year's financial statements as an expense. This ensures that the financial statements accurately reflect the costs associated with the project during the period in which they were incurred.
- **Disclosure:** It is important to clearly disclose this extra cost in the statement of profit and loss (income statement) for the year ended 30-6-2002. This provides transparency to stakeholders about the impact of unexpected events on the company's financial performance during that specific year.
### Conclusion:
Therefore, the Rs. 80 lakhs incurred due to encountering a rocky surface while laying the pipeline should be treated as an expense in the financial year ending 30-6-2002. It should be disclosed in the financial statements for that year as a specific item in the statement of profit and loss, reflecting the additional costs incurred during that period. It is not classified as a prior period item because it relates to events and expenses occurring after the year-end of 30-6-2001.
CAclubindia
