ExpertMedium1 markMultiple Choice
CPA · Question 38 · Area 3: Performing Procedures
Which of the following subsequent events would require adjustment to the financial statements (Type I event)?
Which of the following subsequent events would require adjustment to the financial statements (Type I event)?
Answer options:
A.
Loss of a manufacturing plant due to a fire occurring on January 15.
B.
Sale of a bond issue on January 20.
C.
Settlement of a lawsuit in January for an amount different from the liability recorded at December 31.
D.
Acquisition of a competitor on February 1.
How to approach this question
Ask: Did the condition exist at the Balance Sheet date? Yes = Adjust (Type I). No = Disclose (Type II).
Full Answer
C.Settlement of a lawsuit in January for an amount different from the liability recorded at December 31.✓ Correct
Settlement of a lawsuit in January for an amount different from the liability recorded at December 31.
Type I subsequent events provide additional evidence about conditions that existed at the date of the financial statements. A lawsuit pending at year-end that is settled subsequently confirms the liability existed and clarifies the amount.
Common mistakes
Confusing Type I (Adjust) and Type II (Disclose).
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