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Area III: Select Transactionssubsequent eventsASC 855recognized eventsnon-recognized events

CPA · Question 33 · Area III: Select Transactions

Valley Corp. discovered the following subsequent events after year-end but before the financial statements were issued:<br/><br/>Event 1: A major customer filed for bankruptcy on February 15, Year 2. The customer owed Valley $150,000 at December 31, Year 1.<br/>Event 2: Valley issued $2,000,000 in bonds on January 30, Year 2, to finance expansion.<br/><br/>How should Valley account for these subsequent events in its Year 1 financial statements?

Answer options:

A.

Adjust Year 1 statements for both events

B.

Adjust Year 1 statements for Event 1; disclose Event 2 in notes

C.

Disclose both events in notes without adjustment

D.

No adjustment or disclosure required for either event

How to approach this question

Classify subsequent events as either recognized (providing evidence of conditions existing at balance sheet date) or non-recognized (arising after balance sheet date). Recognized events require adjustment; non-recognized events require disclosure if material.

Full Answer

B.Adjust Year 1 statements for Event 1; disclose Event 2 in notes✓ Correct
Adjust Year 1 statements for Event 1; disclose Event 2 in notes
Under ASC 855, subsequent events are classified as recognized (Type I) or non-recognized (Type II). Event 1 provides evidence about the customer's financial condition at year-end, requiring adjustment to the allowance for credit losses. Event 2 represents a financing decision made after year-end, requiring disclosure but no adjustment.

Common mistakes

Not distinguishing between recognized and non-recognized subsequent events, or failing to consider whether events provide evidence of year-end conditions
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