Question

Module 14 Homework ACCT 107 Part A In each of the following items, a significant subsequent event is described. Assume that you are expressing an opinion on Jensen Company's financial statements for the year ended December 31, 2018 and that you completed fieldwork on January 31, 2019. Choose between the following options: • Type 1 Event-Record and disclose • Type 2 Event - Disclose only Neither - Not reported in the financial statements Event A large account receivable from Barich Company was considered collectible at 12/31. On 1/25/19, Barich suffered a plant explosion. Barich was uninsured and it is unlikely that Jensen wil collect the receivable. In the 12/31 statements, Jensen had provided, in full, for a possible tax liability related to deductions claimed on the 2017 and 2018 tax returns that the IRS disputed. The tax court ruled in favor of the company on 1/15/19. The IRS indicated that it would not appeal the ruling Jensen was approached by a large international company, Megaco, on January 10. The company was interested in purchasing Jensen's Manufacturing Division. Jensen ultimately sold the division to MegaCo on 1/29/19. The assets of the Manufacturing Division constituted 25 percent of Jensen's total assets at 12/31. On 1/20/19, a major investment advisor issued a negative report on Jensen's long-term prospects. The market price of Jensen's common stock subsequently declined by 40 percent.

Answer 1

The following events can be categorized as following:

1. DISCLOSE ONLY : The event that created the doubt regarding collection of receivables from Barich is held after the balance sheet date and hence cannot be recorded in the financial statements. However, the event is significant as Barich is a large account receivable and therefore it is required to be disclosed in financial statements to provide a true and fir view of financial statements.
2. NOT REPORTED IN FINANCIAL STATEMENTS : Jensen has provided for the possible tax liability in the financial statements. The court ruled in the favor of the company. This event shall neither be recorded nor disclosed in the financial statements.
3. DISCLOSE ONLY : The large international company approached Jensen after the balance sheet date and does not impact the going concern assumption of Jensen Company. Therefore it is not required to be recorded in the financial statements. However sale of 25% of assets amounts to sale of substantial assets and is important to be disclosed in financial to provide a true and fair view.
4. RECORD AND DISCLOSE : Although the negative report was issued by the major investment advisor after the end of the financial year, it can impact the going concern of the Jensen Company. Any event that can impact the going concern aspect of a company is required to be recorded and disclosed appropriately.