Which of the following subsequent events would require adjustment to the financial statements (Type I event)?

Answer options:

Loss of a manufacturing plant due to a fire occurring on January 15.

Sale of a bond issue on January 20.

Settlement of a lawsuit in January for an amount different from the liability recorded at December 31.

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

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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