Question 1

Valley Corp. discovered the following subsequent events after year-end but before the financial statements were issued:

Event 1: A major customer filed for bankruptcy on February 15, Year 2. The customer owed Valley $150,000 at December 31, Year 1.
Event 2: Valley issued $2,000,000 in bonds on January 30, Year 2, to finance expansion.

How should Valley account for these subsequent events in its Year 1 financial statements?

Accepted Answer

Classify subsequent events as either recognized (providing evidence of conditions existing at balance sheet date) or non-recognized (arising after balance sheet date). Recognized events require adjustment; non-recognized events require disclosure if material.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Not distinguishing between recognized and non-recognized subsequent events, or failing to consider whether events provide evidence of year-end conditions

How to approach this question

Full Answer

Common mistakes

Practice the full CPA FAR Practice Exam 2

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