Question

What is the accounting issue and potential adjustments for :

In January 20X5, Anne entered into a five-year fixed-price contract for champagne to protect WP against market fluctuations. During each of the first three years of the contract, Anne’s decision appeared to be a good one, as the price of champagne continued to go up. At December 31, 20X7, the market price of champagne dropped significantly. Anne heard that the price per case is expected to remain at this level or drop even more over the next two years. On December 31, Anne triggered the cancellation clause that allows WP to get out of the contract for $60,000. The payment was made and expensed on January 2, 20X8.

Answer 1

Here, the accounting issue is- whether the events that took place after the Balance sheet date would affect the current year financial statements.

In the given case, the price of champagne dropped significantly as on December 31, 20X7. The management took a decision to withdraw from the contract by paying the cancellation amount as on Dec 31, 20X7.

Since the decision was taken to cancel the contract prior to the financial statement closing date, there is an existence of event.

The event would affect the business operations significantly.

Hence, such adjustment shall be made in the financial statments itself for the year endin Dec 31, 20X7 even if the payment was made on Jan 2, 20X8.