ExpertHard1 markMultiple Choice
CPA · Question 10 · Area 1: Financial Reporting
On January 15, Year 2, before the Year 1 financial statements were issued, a customer of Apex Corp. declared bankruptcy due to a fire that occurred on January 10, Year 2. The customer owed Apex $50,000 at December 31, Year 1. How should this event be treated in the Year 1 financial statements?
On January 15, Year 2, before the Year 1 financial statements were issued, a customer of Apex Corp. declared bankruptcy due to a fire that occurred on January 10, Year 2. The customer owed Apex $50,000 at December 31, Year 1. How should this event be treated in the Year 1 financial statements?
Answer options:
A.
Recognize a loss of $50,000 in Year 1.
B.
Disclose the event in the notes to the Year 1 financial statements only.
C.
Recognize a loss in Year 2 and no disclosure in Year 1.
D.
Restate the Year 1 beginning retained earnings.
How to approach this question
Determine if the condition existed at the Balance Sheet date. If yes -> Adjust (Type 1). If no (arose after) -> Disclose (Type 2).
Full Answer
B.Disclose the event in the notes to the Year 1 financial statements only.✓ Correct
B
Since the fire (the cause of the loss) happened on Jan 10, the condition did not exist at the balance sheet date. Thus, the financial statements should not be adjusted. However, because the loss is material, it must be disclosed.
Common mistakes
Assuming all bankruptcies are Type 1 events. Usually they are, but if a specific post-BS date event caused it (like a fire), it is Type 2.
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