areaIII G. Subsequent events Flashcards
Subsequent events are
events or transactions that occur after the
balance sheet date but before financial statements are issued or available to be issued. These events are categorized into two types: Type I (recognized subsequent events) and Type II (nonrecognized subsequent events).
Type I: Recognized Subsequent Events
provide additional evidence about conditions that existed at the balance sheet date and affect the estimates that are
part of financial statement preparation
Example: Settlement of a Lawsuit
A company is involved in a lawsuit at the year-end (December 31, 20X3). The financial statements are to be issued on March 1, 20X4. The lawsuit is settled on February 15, 20X4, for $100,000, though at year-end, the liability was estimated at $150,000.
Accounting Treatment:
Adjust the lawsuit liability to reflect the settlement amount, since the settlement provides additional information about the
company’s liability as of December 31, 20X3.
Debit Lawsuit Liability 150,000
Credit Cash 100,000
Credit Gain on Settlement of Lawsuit 50,000
Type II: Nonrecognized Subsequent Events
provide evidence about conditions that did not exist at the balance sheet date and therefore should not be reflected in
the financial statements. However, they may need to be disclosed if the event provides information that is material to understanding the financial statements.
Example: Loss from a Natural Disaster
A company’s warehouse is destroyed by a natural disaster on January 20, 20X4. The financial statements are being prepared for the year ended December 31, 20X3.
Accounting Treatment
● No adjustment is made to the December 31, 20X3, financial statements, as the event occurred after the balance sheet date.
● Disclose the nature of the event and an estimate of its financial effect in the notes to the financial statements
FAR3B10018
A company is potentially liable for environmental damages estimated at $300,000. The probability of payment is 80%. How should this be treated in the financial statements?
A. Recognize a liability and expense of $240,000.
B. Recognize a liability and expense of $300,000.
C. Disclose in the financial notes.
D. No action required.
B. Recognize a liability and expense of $300,000.
When a contingent liability is probable and can be estimated, the full estimated amount is recorded.
FAR1B10023
An overstatement of accounts payable would require which of the following adjustments?
A. Increase liabilities and decrease net assets
B. Decrease assets and increase expenses
C. Increase assets and decrease liabilities
D. Decrease liabilities and increase net assets
D. Decrease liabilities and increase net assets
Overstating accounts payable means liabilities are higher than they should be. Correcting this error involves decreasing liabilities and correspondingly increasing net assets.
FAR1E002n
Which of the following is a key difference in a defined benefit plan vs a defined contribution plan?
A. The accounting for a defined contribution plan includes reporting pension expense
B. The accounting for a defined benefit plan is significantly more complicated than for a defined contribution plan
C. The accounting for a defined contribution plan is significantly more complicated than for a defined benefit plan
D. The accounting for a defined contribution plan includes calculating the fair value of plan assets
B. The accounting for a defined benefit plan is significantly more complicated than for a defined contribution plan
A defined contribution plan is very simple compared to a defined benefit plan. A defined contribution plan simply involves the employer making a defined contribution to an employee’s investment account, with no guarantee as to the amount of benefits during retirement.
A defined benefit plan involves the employer guaranteeing a set amount to the employee during retirement, so the employer bears the actuarial risk and investment risk of making sure they have the resources to provide the benefits when the employee retires. The accounting involves tracking the projected benefit obligation (PBO – what is the present value of all these future payouts?), the fair value of plan assets (what’s the value of the assets we have to cover the PBO?), and then the pension expense each period (service costs, interest costs, gains/losses on investments, etc).
FAR1A40025
How should an error in the previous year’s foreign currency translation reserve be corrected in the statement of changes in equity?
A) By adjusting the current year’s foreign currency reserve.
B) By revising the current year’s total equity.
C) By amending the opening balance of the foreign currency translation reserve.
D) By altering the current year’s net income.
C) By amending the opening balance of the foreign currency translation reserve.
An error in the foreign currency translation reserve from the previous year should be corrected by amending the opening balance of this reserve in the current year’s statement of changes in equity.
It is not typically corrected by adjusting the current year’s reserve (Option A) or altering the current year’s net income (Option D). While it does affect the total equity (Option B), the specific correction is in the opening balance of the foreign currency translation reserve.
FAR3C10070
When a not-for-profit entity receives a donation of artwork to be held as part of a collection, how should it be recognized?
A. At the fair market value at the time of donation
B. Not recognized if the entity has a policy to not sell the donated items
C. At the historical cost to the donor
D. At an appraised value every year
B. Not recognized if the entity has a policy to not sell the donated items
Donations of artwork to be held as part of a collection may not be recognized if the not-for-profit entity has a policy to not sell the donated items and to use them for public exhibition, education, or research in furtherance of public service.
FAR4A004nsim
Corona City levied $1,000,000 of property taxes. Based on prior year collection rates, the city estimated that $100,000 of the property taxes would be uncollectible.
Based on this information, how would the city account for the estimated $100,000 of uncollectible taxes?
A. A credit to “allowance for uncollectible taxes”
B. A debit to “allowance for uncollectible taxes”
C. A credit to “bad debt expense”
D. A debit to “bad debt expense”
A. A credit to “allowance for uncollectible taxes”
The levy was for $1,000,000, so Corona City would debit “property tax receivable” for $1,000,000. The credit would be to revenue for $900,000, and a credit to “allowance for uncollectible taxes” for $100,000. Bad debt expense is an accrual accounting item.
As a sidenote: when property taxes are levied, the actual funds from the taxes aren’t “available” right then, but the government can accrue the likely collectible amount as revenue if the amounts are legally due by the end of the period (or within 60 days of the end of the current period – the 60 day rule).
FAR2E011n
The equity method should be used to account for an investment in the stock of another company when:
A. The investor provides raw materials to the investee.
B. The investment is in the preferred stock of the investee.
C. The investment is less than 20% of the voting stock of the investee.
D. The investment enables the investor to exercise significant influence over the investee.
D. The investment enables the investor to exercise significant influence over the investee.
The equity method is used when the investor has significant influence over the investee. In general, (and unless stated otherwise in a question) any investment of 20-50% ownership in the voting stock of another company is considered to give the investor “significant influence”.
There are some cases when the investor still won’t have significant influence even when owning 20-50% of the investee, and cases where the investor still has significant influence with an investment lower than 20%.
FAR1D10025
What impact does the exercise of stock options have on the basic EPS calculation?
A. It increases the numerator (Net Income).
B. It increases the denominator (Weighted Average Shares Outstanding).
C. It decreases the numerator (Net Income).
D. It has no impact on the basic EPS calculation.
D. It has no impact on the basic EPS calculation.
The exercise of stock options does not impact the calculation of basic EPS. Basic EPS is calculated using the weighted average number of shares outstanding, which does not account for the potential increase in shares from option exercises.
FAR2D10040
How is the carrying amount of an asset held for sale initially measured?
A. At its fair value less costs to sell
B. At its historical cost
C. At its net realizable value
D. At the lower of its carrying amount and fair value less costs to sell
D. At the lower of its carrying amount and fair value less costs to sell
The initial measurement of an asset held for sale is at the lower of its carrying amount and fair value less costs to sell.
FAR3C10029
How are transfers received by a not-for-profit entity with a directive to use them for a third-party’s benefit, and without the ability to redirect those funds, typically recorded?
A. As contribution revenue
B. As a liability
C. As an increase in temporarily restricted net assets
D. They are not recorded on the entity’s financial statements
D. They are not recorded on the entity’s financial statements
Transfers received by a not-for-profit entity with a directive to use them for a third-party’s benefit, without the ability to redirect those funds, are typically not recorded on the entity’s financial statements.
FAR2D10049
When should the fair value less costs to sell of an asset held for sale be reassessed?
A. Annually
B. Only at the time of initial classification
C. At each reporting date
D. Every five years
C. At each reporting date
The fair value less costs to sell of an asset held for sale should be reassessed at each reporting date to determine if an impairment loss is necessary.
FAR4C002aicpa
If a city government is the primary reporting entity, which of the following is an acceptable method to present component units in its combined financial statements?
A. Consolidation
B. Cost method
C. Discrete presentation
D. Government-wide presentation
C. Discrete presentation
This is the term for how component units are presented on government-wide financial statements. The other way that component units can be reported is “blended” with the primary government.
The difference is, if the component unit performs services solely for the primary government and not to the general public, then its activities are “blended” with the primary government. If the component unit is financially dependent on the primary government but provides services to the general public, then its activities are presented using discrete presentation. By the way, discrete presentation means the component unit is presented in a separate column from the primary government on the government-wide financial statements.
