1. The customer of PDQ Manufacturing, who filed for Chapter 7 bankruptcy creates a Type 1 event. This subsequent event provides additional evidence about facts existing on or before the date of the balance sheet.
It requires the adjustment of the financial statements.
2. The type of subsequent event created by the death of the board treasurer is a Type 2 event. It does not require any adjustment to the financial statements of PDQ. It should be disclosed in the financial statements.
3. The type of subsequent event about the death of the board treasurer is a Type 2 event, which is a non-adjusting event. It does not require any adjustment to the 12/31/19 financial statements of PDQ. It should be disclosed in the financial statements.
4. The type of event about the fire in the customer's warehouse is a Type 2 event. It does not require adjustment, though disclosure is necessary.
5. For Dillon & Company CPAs to adjust the financial statements for the fire, they need to establish and reconcile the estimated damage versus insurance compensation.
Question Completion:
BACKGROUND:
A subsequent event refers to an event that occurs after the date of the audited balance sheet but prior to the date of the auditors' report. Subsequent events can be divided into two broad categories. The first are those that provide additional evidence about facts that existed either on or before the balance sheet date (Type I events). The second are those that involve facts that came into existence after the balance sheet date (Type II events). Type I events require adjustment to the financial statements while Type II events only require financial statement disclosure.
Dillon & Company, CPAs, are auditing the financial statements of PDQ Manufacturing as of December 31, 2009. During the fieldwork of its audit (March 2010), the auditors noted the following situations:
a. A major customer who owed PDQ $10,000 in accounts receivable (a material amount) filed for Chapter 7 bankruptcy.
b. A warehouse where the customer stored some of its inventory for resale had a fire. Estimated damage could not yet be quantified.
c. In addition, the company's board treasurer was killed in a tragic plane crash. Dillon & Company is now ready to issue its audit opinion.
Thus, subsequent events affecting the financial statements may require adjustments or disclosure in the financial statements.
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