the field work for the June 30, 20X7 audit of the Tau Brewing Comany was finishe
ID: 2471370 • Letter: T
Question
the field work for the June 30, 20X7 audit of the Tau Brewing Comany was finished on august 19, 20X7, and the completed financial statements, accompanied by the signed audit reports, were mailed September 6, 20X7. Consider each of the following subsequent events listed below to be highly material.
(a) On December 14, 20X7, the auditor discovered that a debtor of Tau Brewing went bank rupt on October 2, 20X7. The sale had taken place on april 15, 20X7, but the amount appeared to becollectible at June 30, 20X7 and August 19, 20X7.
(b)On August 6, 20X7, the auditor discovered that a debtor of Tau Brewing went bankrupt on July 30, 20X7. The cause of the bankruptcy was an unexpected loss of a major lawsuit on July 15, 20X7 resulting from a product liability suit by a different customer.
(c)On july 20,20X7, the auditor discovered an uninsured lawsuit against Tau Brewing which had originated on February 28,20X7.
(d)On July 20, 20X7, a lawsuit was field against Tau Brewing for a patent infringement action which allegedly took place in early 20X7. In opinion of legal counsel there is a danger of a significant loss to the client.
(e)On September 14, 20X7, Tau Brewing lost a court case which had originated in 20X6 for an amount equal to the lawsuit. The June 30, 20X7 footnotes state that in the opinion of legal counsel, there will be a favorable outcome to the client and the settlement amount will be less than the amount of the lawsuit.
(f)On August 1, 20X7, Tau Brewing agreed to purchase for cash all of the outstanding stock of Delta, Inc., a small brewery in the same geographical area. The acquisition will probably increase the company's volume by 50%.
REQUIRED: For each of the above subsequent events, indicate the following.
(1) Whether it is a Type I or Type II subsequent event.
(2) What type of action should be taken concerning the subsequent event.
(3) An explanation for your choices in (1) and (2) above.
Explanation / Answer
1. Type I events are Adjusting events for Post BAlance sheet date ytransactions when it is found that the condition of the transaction was existent on the balance sheet date also. Type II are non adjusting Post BAlance sheet date transactions where the condition of the transaction was not present on the balance sheet date.
2 & C.
a) The debtor went banrupt in Oct 20X7. Till June 20X7 and Aug 19 20X7 the amount appeared collectible, that means the Bankruptcy condidition was not thyeer on June 30 20X7. So it is non adjusting event , but coonsidering fairness of the financial statements, a note describing the event should be provided.
b). The debtor went bankrupt on July 30th 20X7 due to a lawsuit on Jul 15 20X7. So it is clear that the bankruptcy condition was not there on June 30 20X7. So it is non adjusting event , but coonsidering fairness of the financial statements, a note describing the event should be provided.
c) The uninsured lawsuit originated in Feb 20X7, so the condition existed on June 30 20X7. Therefore , if the liability is probable and amount can be ascertained , it has to be recorded as contingent liability, otherwise a disclosure in Notes has to be made. It may be adjusting event depending on the liability probability and amount estimation possibility.
d) The patent infrimgment happened in early 20X7 and there is danger of significant loss, so the condition existed on June 30 20X7 , the balance sheet date. Therefore , if the liability is probable and amount can be ascertained , it has to be recorded as contingent liability, otherwise a disclosure in Notes has to be made. It may be adjusting event depending on the liability probability and amount estimation possibility.
e) The lawsuit originated in 20X6,so the condition existed on June 30 20X7 , the balance sheet date. Therefore the loss is an adjusting event and the same to be recorded in the financials. So the financials need to be revised with the loss recording.
f) The acquition declared on Aug 1 20X7, so the condition was not existing on June 30 20X7. It is non adjusting event. However, as the future business volume will be impacted, the incident may be disclosed as a footnote for the benefit of the investors and shareholders.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.