Which of the following events occurring after the reporting date but before the financial statements are issued requires ADJUSTMENT to the financial statements?

Answer options:

Loss of plant due to fire occurring in January (Year 2).

Settlement of a lawsuit in January (Year 2) for an amount different from the liability recorded at December 31 (Year 1).

Issuance of a large bond payable in January (Year 2).

Purchase of a subsidiary in January (Year 2).

How to approach this question

Type 1 (Recognized): Provides evidence of conditions existing at BS date (e.g., lawsuit settlement, customer bankruptcy). <br/>Type 2 (Non-recognized): Conditions arose AFTER BS date (e.g., fire, market crash). Disclosure only.

Full Answer

B.Settlement of a lawsuit in January (Year 2) for an amount different from the liability recorded at December 31 (Year 1).✓ Correct

The lawsuit was pending at the balance sheet date. The settlement provides better evidence of the liability that existed at that date. This is a Recognized Subsequent Event requiring adjustment.

Common mistakes

Thinking all major subsequent events require adjustment (most are disclosure only).

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