Question

Syarikat X-Chem Sdn Bhd is a chemical manufacturer that has four finished material storage locations around Hulu Perak. X-Chem closed its accounts on April 30, 2020. The final audit is nearing completion and the final financial statements and audit report will be signed next week. The company's revenue for the current year is RM55 million and profit before tax was RM5.6 million. The following two incidents have occurred, however the management of X-Chem has not taken any action on them. Event 1 - Damaged chemicals It is customary for a company to conduct a strict quality control inspection each time before shipping chemical inventory to its customers. Tests on May 3, 2020 found that a large number of chemicals produced in April 2020 had been damaged. The loss incurred was RM0.85 million. In that case, the inventory can only be sold at a scrap price of RM0.1 million. The cost to recover inventory is so great that management does not consider inventory recovery as an alternative option. Event 2 - Explosion On May 20, 2020, an explosion occurred at one of the company's storage plants. The incident caused damage to inventory and storage plants and equipment at the location. Management has investigated the cause of the explosion and believes the company will most likely fail to claim insurance. The loss is estimated at RM0.9 million without having any scrap value.

          Syarikat X-Chem Sdn Bhd is a chemical manufacturer that has four finished material storage
locations around Hulu Perak. X-Chem closed its accounts on April 30, 2020. The final audit is
nearing completion and the final financial statements and audit report will be signed next
week. The company's revenue for the current year is RM55 million
and profit before tax was RM5.6 million. The following two incidents have occurred, however
the management of X-Chem has not taken any action on them.
Event 1 - Damaged chemicals
It is customary for a company to conduct a strict quality control inspection each time before
shipping chemical inventory to its customers. Tests on May 3, 2020 found that a large number
of chemicals produced in April 2020 had been damaged. The loss incurred was RM0.85
million. In that case, the inventory can only be sold at a scrap price of RM0.1 million. The cost
to recover inventory is so great that management does not consider inventory recovery as an
alternative option.
Event 2 - Explosion
On May 20, 2020, an explosion occurred at one of the company's storage plants. The incident
caused damage to inventory and storage plants and equipment at the location. Management
has investigated the cause of the explosion and believes the company will most likely fail to
claim insurance. The loss is estimated at RM0.9 million without having any scrap value.

Syarikat X-Chem Sdn Bhd is a chemical manufacturer that has four finished material storage
locations around Hulu Perak. X-Chem closed its accounts on April 30, 2020. The final audit is
nearing completion and the final financial statements and audit report will be signed next
week. The company's revenue for the current year is RM55 million
and profit before tax was RM5.6 million. The following two incidents have occurred, however
the management of X-Chem has not taken any action on them.
Event 1 - Damaged chemicals
It is customary for a company to conduct a strict quality control inspection each time before
shipping chemical inventory to its customers. Tests on May 3, 2020 found that a large number
of chemicals produced in April 2020 had been damaged. The loss incurred was RM0.85
million. In that case, the inventory can only be sold at a scrap price of RM0.1 million. The cost
to recover inventory is so great that management does not consider inventory recovery as an
alternative option.
Event 2 - Explosion
On May 20, 2020, an explosion occurred at one of the company's storage plants. The incident
caused damage to inventory and storage plants and equipment at the location. Management
has investigated the cause of the explosion and believes the company will most likely fail to
claim insurance. The loss is estimated at RM0.9 million without having any scrap value.

Added by Shane F.

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