Question

Ouestion #3: For each of the following items, assume that Josh Feldstein, CPA, is expressing an opinion on Scomick Company's financial statements for the year ended December 31, 2015; that he completed fieldwork on January 21, 2016; and that he now is preparing his opinion to accompany the financial statements. In each item a subsequent event is described. This event was disclosed to the CPA either in connec- tion with his review of subsequent events or after the date on which the auditor has obtained sufficient appropriate audit evidence. Describe the financial statement ef fects, if any, of each of the following subsequent events. Each of the five items is independent of the other four and is to be considered separately 1. A large account receivable from Agronowitz Company (material to financial statement presentation) was considered fully collectible at December 31, 2015. Agronowitz suffered a plant explosion on January 25, 2016. Because Agronowitz was uninsured, it is unlikely that the account will be paid. 2. The tax court ruled in favor of the company on January 25, 2016. Litigation involved deductions claimed on the 2012 and 2013 tax returns. In accrued taxes pay- able, Scornick had provided for the full amount of the potential disallowances. The Internal Revenue Service will not appeal the tax court's ruling. 3. Sconick's Manufacturing Division, whose assets constituted 45 percent of Scornick's total assets at December 31, 2015, was sold on February 1, 2016. The new owner assumed the bonded indebtedness associated with this property 4. On January 15, 2016, R. E. Fogler, a major investment adviser, issued a negative report on Scornick's long-term prospects. The market price of Scomick's common stock subsequently declined by 40 percent. 5. At its January 5, 2016, meeting. Scornick's board of directors voted to increase substantially the advertising budget for the coming year and authorized a change in advertising agencies. eW

Answer 1

We need to know what is a subsequent event first to answer this question.

Subsequent Event : Transactions or events that occur after balancesheet date but before the issuance of the financial statements, that have a material impact on financial statements. These are called subsequent events. Basically subsequent events are of two types.

A) Type 1 : These events provide additional evidence about the conditions that existed at the balancesheet date and affect the estimates that are part of financial statements preparation. These events require adjustments in the financial statements and disclosures to reflect new information(If material)

B) Type 2 : These events provide evidences about the conditions that did not exist at the balancesheet date but arose subsequent to that date. These require a disclosure in the notes to financial statements. There is no need of adjusting the financial statments.

1. In the first instance, its a Type 2 event, As the loss on receivables from Agronowitz was caused by conditions such as business failure arising subsequent to the balance sheet date on account of plant explosion on Jan,26,2016. So there is a need to make a disclosure of the same in the 2015 financial statements, no adjustment to financial statements will be made.

2. The tax court ruling in favor of Scornick company is an event whose conditions existed on the balance sheet date and involves revision of the estimate. The 2015 financial statements should be adjusted to reflect the favorable ruling. Its a type 1 event.

3. The sale of Scornick's manufacturing division is an event whose conditions did not exist at the balancesheet date. This event requires disclosure in the 2015 financial statements. Its a type 2 event.

4. This is not an event that is considered subsequent for financial statement purposes.

5. This is not an event that is considered subsequent for financial statement purposes.