ExpertMedium1 markMultiple Choice
CPA · Question 49 · Area III: Select Transactions
A company has a December 31 year-end. On January 15, Year 2, before the financial statements were issued, a major customer declared bankruptcy due to a fire that destroyed their plant on January 10, Year 2. The customer owed $50,000 at December 31. How should this be reported in the Year 1 financial statements?
A company has a December 31 year-end. On January 15, Year 2, before the financial statements were issued, a major customer declared bankruptcy due to a fire that destroyed their plant on January 10, Year 2. The customer owed $50,000 at December 31. How should this be reported in the Year 1 financial statements?
Answer options:
A.
Accrue a $50,000 loss in Year 1
B.
Adjust the allowance for doubtful accounts in Year 1
C.
Disclose the event in the notes to the Year 1 financial statements
D.
No disclosure or accrual required
How to approach this question
Subsequent Events: <br/>Type I (Recognized): Condition existed at BS date (e.g., bankruptcy due to long-term decline). -> Adjust FS. <br/>Type II (Non-recognized): Condition arose after BS date (e.g., fire, natural disaster). -> Disclose only.
Full Answer
C.Disclose the event in the notes to the Year 1 financial statements✓ Correct
C
This is a non-recognized (Type II) subsequent event because the condition (the fire) arose after the balance sheet date. The financial statements should not be adjusted, but the event should be disclosed due to its material impact.
Common mistakes
Adjusting for all bankruptcies (usually bankruptcy confirms a condition that existed, but here the cause is explicitly a post-year-end fire).
Practice the full CPA FAR Practice Exam 3
50 questions · hints · full answers · grading
More questions from this exam
Q01Dunn Corp. is preparing its Year 1 balance sheet. The following issues were identified during the...HardQ02On October 1, Year 1, Host Co. approved a plan to dispose of a component of its business. The dis...HardQ03Selected financial information for Zeno Corp. for the year ended December 31, Year 1:<br/>- Cost ...MediumQ04Parch Co. owns 80% of Scribe Inc. During Year 1, Parch sold inventory to Scribe for $500,000. The...HardQ05A company had the following equity transactions in Year 1:<br/>- Jan 1: 100,000 shares outstandin...Hard