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 occurred on January 10, Year 2. The customer owed $50,000 at Dec 31. How should this be treated in the Year 1 financial statements?

Answer options:

Adjust the financial statements to write off the receivable.

Disclose the event in the notes only.

No disclosure or adjustment required.

Recognize a provision for 50% of the debt.

How to approach this question

Did the condition exist at the Balance Sheet date? Fire happened Jan 10 -> Did not exist at Dec 31. Therefore, Non-recognized event. Disclosure required if material.

Full Answer

B.Disclose the event in the notes only.✓ Correct

Type I (Recognized): Condition existed at BS date. Type II (Non-recognized): Condition arose after BS date. The fire occurred in Year 2, so the loss of ability to pay arose in Year 2. Do not adjust Year 1 numbers; disclose in notes.

Common mistakes

Adjusting for events that arose after year-end.

Question 46 All questions Question 48

Practice the full CPA FAR Practice Exam 4

50 questions · hints · full answers · grading

More questions from this exam

Q01Orion Corp. is preparing its Statement of Cash Flows for the year ended December 31, Year 1, usin...Hard Q02Parent Co. acquired 80% of Sub Co. on January 1, Year 1. During Year 1, Parent sold inventory to ...Hard Q03A nongovernmental not-for-profit organization received a $500,000 pledge in Year 1 to be used for...Medium Q04A nongovernmental not-for-profit entity reports the following cash flows for the current year:<br...Medium Q05A city government levies a special property tax dedicated solely to the repayment of general obli...Medium

View all 50 questions →