Chapter 42

Events after the Reporting Period

PROBLEM 42-1: IDENTIFICATION

1. ADJUSTING
2. ADJUSTING
3. NON-ADJUSTING
4. ADJUSTING
5. ADJUSTING
6. NON-ADJUSTING
7. NON-ADJUSTING
8. ADJUSTING
9. NON-ADJUSTING
10. NON-ADJUSTING

PROBLEM 42-2: IDENTIFICATION

1. NON-ADJUSTING
2. ADJUSTING
3. NON-ADJUSTING
4. ADJUSTING
5. ADJUSTING
6. NON-ADJUSTING
7. NON-ADJUSTING
8. ADJUSTING
9. NON-ADJUSTING
10. NON-ADJUSTING

PROBLEM 42-3: MULTIPLE CHOICE THEORY

1. B 6. A
2. A 7. B
3. A 8. D
4. B 9. C
5. A 10. D

PROBLEM 42-4: THEORY & COMPUTATIONAL

1. D The application of a letter of guarantee is not an obligating event. An

obligating event would be the application and granting of loan. Moreover,
the application of a letter of guarantee need not be disclosed by the
grantee (ABC Ltd.). However, the guarantor (not ABC Ltd.) may disclose
the guarantee if it is deemed a significant commitment.

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2. C Before a liability is recognized, all of the following conditions must first
be met:
a. The item meets the definition of a liability (i.e., present obligation
arising from past events);
b. Probable outflow of resources embodying economic benefits; and
c. The outflow can be measured reliably.

If not all the conditions are met, no liability is recognized. However, the entity
may disclose a contingent liability if the outflow is deemed reasonably
possible.

In the problem above, the fact that a lawsuit is filed cannot be presumed that
the outflow is probable.

3. B

4. D Only a disclosure shall be made because there is no present obligation

as of the end of the reporting period, i.e., the fire happened subsequent
to year-end.

5. C Changes in fair values, market prices and exchange rates after the
end of the reporting period are non-adjusting events.

PROBLEM 42-5: EXERCISES COMPUTATIONAL

1. Solution:
Unadjusted profit 1,000,000
(a) Impairment loss (100,000)
(c) Additional write-down of inventory (120K - 100K) (20,000)
Adjusted profit 880,000

2. Solution:
Unadjusted profit 2,000,000
(c) Impairment loss (500,000)
Adjusted profit 1,500,000

3. Solutions:

Current Noncurrent
assets assets Liabilities Equity Profit
Unadjusted
balances 3,000,000 7,000,000 4,000,000 6,000,000 2,000,000
(a) (300,000) 300,000
(b) 500,000 (500,000) (500,000)
(e) 160,000 160,000 160,000
Adjusted
balances 2,700,000 7,460,000 4,500,000 5,660,000 1,660,000

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4. Solutions:

Requirement (a):

McMaster, Inc.
Statement of financial position
As of December 31, 2001 and 2000

ASSETS 2001 2000

Current assets
Cash and cash equivalents 550,000 300,000
Trade and other receivables 874,000 720,000
Held for trading securities 156,000 -
Inventories 820,000 770,000
Total current assets 2,400,000 1,790,000

Noncurrent assets:
Property, plant and equipment (1) 384,000 192,000

TOTAL ASSETS 2,784,000 1,982,000

LIABILITIES & EQUITY

Current liabilities:
Trade and other payables 340,000 194,000
Note payable 100,000 -
Total current liabilities 440,000 194,000

Noncurrent liabilities:
Note payable 500,000 600,000

TOTAL LIABILITIES 940,000 794,000

Common stock, 10 par 420,000 420,000

Additional paid-in capital 260,000 260,000
Retained earnings (2) 1,164,000 508,000
TOTAL EQUITY 1,844,000 1,188,000

TOTAL LIABILITIES & EQUITY 2,784,000 1,982,000

(1) (620,000 300,000 + (80,000 x 4/5) = 384,000

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(2)

Retained earnings, unadjusted 930,000

(b) Overstatement of ending inventory (30,000)
(c) Asset charged as expense (80K x 4/5) 64,000
(d) Contingent liability 200,000
Retained earnings, adjusted 1,164,000

Requirement (b):

McMaster, Inc.
Statements of profit or loss
For the years ended December 31, 2001 and 2001

ASSETS 2001 2000

Net sales 3,160,000 2,500,000
Cost of sales (1.510M + 30K overstatement of EI) (1,540,000) (1,380,000)
Gross profit 1,620,000 1,120,000
Selling costs (295,000) (219,000)
Administrative expenses (984K - 295K + 80K) (609,000) (511,000)
Depreciation [58K + (80K/5)] (74,000) (36,000)
Unrealized gain on held for trading securities 14,000
Profit for the year 656,000 354,000

Requirement (c):

Summary of significant accounting policies.

A description of accounting principles and methods used in recognizing
revenues and allocating asset costs to current and future periods.
Specifically, McMaster should disclose accounting policies relating to
measurement of financial assets, inventories, and depreciable assets
and any other policies that would influence the decisions of users.

Information regarding loss contingency.

A description of the pending legal action, including information and data
to assist users in evaluating the risk of potential loss. Based on the
opinion of McMaster's counsel, the estimated loss of 200,000 should
not be reported in the financial statements, but the contingency should
be described in a note, since the incurrence of a loss is "reasonably
possible."

Information regarding the bankruptcy of a major customer.

This type of subsequent event does not affect the amounts reported in
the financial statements, because the casualty giving rise to the
bankruptcy occurred after McMaster's balance sheet date.

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 Additional information to support totals in financial statements.
For example, McMaster might present additional detail for trade and
other receivables, property, plant and equipment, and trade and other
payables.