Which of the following describes a 'Type II' subsequent event?

Answer options:

Bankruptcy of a customer that confirms a loss existed at the balance sheet date.

A fire destroying a warehouse after the balance sheet date but before issuance.

Settlement of litigation that existed at the balance sheet date.

Discovery of fraud occurring during the year.

How to approach this question

Ask: Did the cause exist on Dec 31? Fire happened later -> No -> Type II (Disclose). Customer was broke on Dec 31 -> Yes -> Type I (Adjust).

Full Answer

B.A fire destroying a warehouse after the balance sheet date but before issuance.✓ Correct

Type II events arise from conditions occurring AFTER the balance sheet date. They are disclosed to keep statements from being misleading, but the financial numbers are not adjusted.

Common mistakes

Adjusting the numbers for a Type II event.

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