[Annie]

I’m taking audit next week and still don’t understand what kind of subsequent event requires an adjustment to the financial statements. For instance,

1) Uninsured loss of inventories purchased in Yr 1 as a result of a flood in Yr 2

2) Loss on an uncollectible trade receivable recorded in Yr 1 from a customer that declared bankrupty in Yr 2

3) Contingency resolved in Yr 2, which had been disclosed in Yr 1

According to the answer, only 2) requires an adjustment to the financial statements.

But why? all of these events relate to the Yr 1 financial statements and are subsequent events that happened in Yr 2 as far as I understand. Would someone please explain to me how I can identify sub events that require adjustments to the financial statements?

Thanks in advance!!

[Anonymous]

I believe #2 is the correct answer because it theoretically should have been written off as a bad debt in yr 1, since the customer was having financial difficulty making collection unlikely. So this means that A/R was overstated as of December 31.

For #1, the loss happened in year 2. As of December 31, the inventory was valued appropriately.

For #3, the contingency was resolved in year 2, but was properly disclosed as of December 31. This means that any liabilities were accrued accordingly, if needed.

I think I had this same question on Wiley…

[zonast]

The correct answer is number 2. Here is the reasoning that makes sense to me…anyone may correct me if I'm wrong.

1) Uninsured loss of inventories purchased in Yr 1 as a result of a flood in Yr 2 ==> The loss was uninsured and therefore the loss was not an event that was tied to the purchase of the inventory.

2) Loss on an uncollectible trade receivable recorded in Yr 1 from a customer that declared bankrupty in Yr 2 ==> The rec'v able would still be on the books from one year to the next, therefore if it was discovered that the rec'v was no longer collectable, then you would need to tie it back to the sale. Only if you knew that the customer might declare BK, could a disclosure be made in Yr 1, but it wouldn't be likely (and is not mentioned in this question).

3) Contingency resolved in Yr 2, which had been disclosed in Yr 1 ==> Because the contingency was disclosed in Yr 1, it doesn't need to be tied back to (See #2 reasoning).

Hope this helps.

[Author]

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