Which of the following subsequent events would require adjustment to the financial statements for the year ended December 31, Year 1?

Answer options:

Loss of a manufacturing plant due to a fire on January 15, Year 2.

Sale of a bond issue on January 20, Year 2.

Settlement of a lawsuit in January Year 2 for an amount different from the liability recorded at December 31, Year 1, based on events that occurred in Year 1.

Acquisition of a competitor on February 1, Year 2.

How to approach this question

Distinguish Type 1 (Recognized - existed at BS date) vs Type 2 (Non-recognized - arose after BS date).

Full Answer

C.Settlement of a lawsuit in January Year 2 for an amount different from the liability recorded at December 31, Year 1, based on events that occurred in Year 1.✓ Correct

The settlement of a lawsuit confirms a condition that existed at the balance sheet date (the liability for the suit). This is a Type 1 (Recognized) subsequent event requiring adjustment to the financial statements. The other options describe events that arose entirely after year-end (Type 2), which require disclosure but not adjustment.

Common mistakes

Confusing the settlement date (Jan) with the condition date (Dec).

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