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Subsequent Events Quiz

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This week's quiz brought to you by:
Professor Diane Roberts
University of San Francisco




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1 - Subsequent Events (also called Post-Balance Sheet Events) occur after fiscal year end but before that year end’s financial statements are issued. Appropriate treatment for these events in the about to be issued 12-31-07 financial statements is:
adjustment of the amounts reported in the 12-31-07 financial statements.
disclosure in the footnotes to the 12-31-07 financial statements.
no adjustment or disclosure in the 12-31-07 financial statements.
any of the above depending on the specific type of event.

2 - Subsequent events do not require reporting if the post-balance sheet event provides:
financial information about the company's ability to be a going concern.
non-financial information or normal, on-going financial information about the new year.
information about correct amounts or disclosure at year end.
financial information about extraordinary events.

3 - Appropriate treatment of Board of Directors approval of a two for one stock split after the 12-31-07 year end but before the financial statements are issued is:
adjustment of the amounts reported in the 12-31-07 financial statements.
disclosure in the footnotes to the 12-31-07 financial statements.
no adjustment or disclosure in the 12-31-07 financial statements.
any of the above depending on management’s discretion.

4 - Two weeks after the 12-31-07 year end a customer who has a large receivable balance at year end declared bankruptcy as the result of the customer’s continued, deteriorating financial condition. The accounting treatment for this is:
adjustment of the amounts reported in the 12-31-07 financial statements.
adjustment of the amounts reported in the 12-31-08 financial statements.
disclosure in the footnotes to the 12-31-07 financial statements.
no adjustment or disclosure to the 12-31-07 financial statements.

5 - An example of a post-balance sheet event that must be disclosed in the footnotes to the financial statements is:
The Company entered into an agreement with a new advertising company for an exciting, modern image campaign.
Workers in the company's main plant voted to strike until their wage demands are met.
The Company acquired a competitor's company in a purchase transaction.
All of the above must be disclosed.

6 - The company president had a heart attack from eating too much holiday candy and resigned after the 12-31-07 year end. A national search is under way to locate a replacement. The treatment for this information in the 12-31-07 financial statements is:
adjustment of the amounts reported in the financial statements.
disclosure in the footnotes to the financial statements.
no adjustment or disclosure in the financial statements.
any of the above depending on management’s discretion.

7 - There was no accrual at the 12-31-07 year end for an on-going lawsuit alleging environmental pollution by the company. Before the financial statements are issued the case was decided and the jury awarded a settlement of $5,000,000. The accounting treatment for this is:
adjustment of the amounts reported in the 12-31-07 financial statements.
adjustment of the amounts reported in the 12-31-08 financial statements.
disclosure in the footnotes to the 12-31-07 financial statements.
no adjustment or disclosure to the 12-31-07 financial statements.

8 - Analysis of intangible assets during preparation of the 12-31-07 year end statements revealed that the 2003 amortization expense was incorrect due to a mathematical error. The accounting treatment for this is:
no adjustment of the 12-31-07 financial statements since this a prior period error and the correction can be made in 12-31-08’s financial statements.
adjustment of the 12-31-07 financial statements since the error is discovered before the 12-31-07 financial statements are issued.
footnote disclosure in the 12-31-07 financial statements that the prior period adjustment is going to be made on the 12-31-08 financial statements.
adjustment of the financial statements for either December 31 2007 or 2008 based on management’s judgment.

9 - An example of an event occurring after 12-31-07 and before the financial statements are issued that must be adjusted in the 12-31-07 financial statements is:
The company issues additional common stock.
The company issues additional bonds payable at a premium.
The company suffers the extraordinary loss of one of its three warehouses.
None of the above must be adjusted in the financial statements.

10 - At 12-31-07 a footnote was proposed for the inability to estimate warranty costs for a product introduced during 2007. Additional information from claims before issuance of the financial statements allowed the company to estimate warranty costs at 2% of sales. The accounting treatment for this is to:
continue to footnote as there should be a warranty cost per unit estimate.
continue to footnote as this is a change in accounting estimate.
record the warranty liability and expense in the 12-31-07 financial statements as the estimate was made before the financial statements are issued.
footnote or record based on the product development engineers’ recommendation.

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