Lesson 27

Question 1

What are related party transactions?

Answer 1

They arise when a company engages in transaction in which one of the parties has the ability to significantly influence the policies of the other.

Question 2

What should be disclosed when deal with related party transactions?

Answer 2

1. the nature of the relationship involved.
2. a description of the transactions for each of there period for which income statements are presented.
3. the dollar amounts of transaction for each of the periods for which income statements are presented.
4. amounts due from or to related parties as of the date of each balance sheet presented.

Question 3

What is a post balance sheet event (subsequent event)?

Answer 3

When events that took place after the formal balance sheet date but before the statement is issued.

Question 4

Subsequent event rules

Answer 4

1. IF the condition existed at the balance sheet date, then it requires recognition in the financial statements.
2. if the condition did not exist at the balance sheet date, then it requires disclosure in the footnotes.

Question 5

Subsequent event examples

Answer 5

1. issue new debt or securities
2. business combination
3. lawsuit or ruling

Question 6

Which post-balance-sheet event would require adjustment of the accounts before issuance of the financial statements?

Answer 6

Settlement payments paid on a lawsuit, the outcome of which was deemed uncertain at year end

The loss on a lawsuit, had the amount been known on the balance sheet date, would have been recorded on the financial statements as a contingent liability.

Question 7

Regarding related party transactions, what needs to be disclosed in the notes to the financial statements?

Answer 7

The nature of the relationship involved

GAAP requires four disclosures of material related-party transactions: (1) the nature of the relationship(s) involved; (2) a description of the transaction for each of the periods for which the income statement is presented; (3) the dollar amounts of transactions for each period for which the income statement is presented; and (4) the amounts due to and from the related parties as of the balance sheet date.