Chapter 5

Events after the Reporting Period

Problem 5-1

Caroline Company provided the following information on December 31, 2019:

1/15/2020 P3,000,000 of accounts receivable was written off due to the bankruptcy
of a major customer.

2/14/2020 A shipping vessel of Caroline with carrying amount of P5,000,000 was

completely lost a sea because of a hurricane.

3/11/2020 A court case involving Caroline as the defendant was settled and the
entity was obligated to pay the plaintiff P1,500,000. Caroline previously
recognized a P1,000,000 liability for the suit because management
deemed it probable that the entity would lose the case.

3/25/2020 One of Caroline’s factories with a carrying amount of P15,000,000 was

completely razed by forest fires that erupted in its vicinity.

The management of the entity completed the draft of the financial statements for 2019
on February 10, 2020.

On March 20, 2020, the board of directors authorized the financial statements for issue.
The entity announced the profit and other selected information on March 22, 2020.

The financial statements were made available to shareholders on April 2, 2020 at the
annual shareholders’ meeting where the financial statements were approved.

The financial statements were filed with the regulatory agency the very next day.

Required:

1. Prepare adjusting entries on December 31, 2019 to reflect the adjusting events after
reporting period.

2. Prepare the necessary disclosures to reflect the nonadjusting events after reporting
period.
 Answer:

1. Doubtful accounts 3,000,000

Allowance for doubtful accounts 3,000,000

Loss on lawsuit 500,000

Estimated liability 500,000

Actual liability 1,500,000

Amount already recognized 1,000,000
Increased in liability 500,000

2. Note disclosure

A shipping vessel of Caroline with carrying amount of P5,000,000 was completely lost at
sea because of a hurricane on February 14, 2020. The financial statement for 2019
were authorized for issue on March 20, 2020

There is no need to disclose the factory destroyed in the fire because the event
occurred on March 25, 2020 which is after the issuance of the financial statements for
2019 on March 20, 2020

Problem 5-2

Elaine Company prepared draft financial statements that showed the profit before tax
for the year ended December 31, 2019 at P9,000,000. The board of directors authorized
the financial statements for issued on March 20, 2019.

A fire occurred at one of Elaine’s sites on January 15, 2020 with resulting damage
amounting to P7,000,000, only P4,000,000 of which is covered by insurance. The
repairs will take place and be paid on April 2020.

The P4,000,000 claim from the insurance entity will however be received of February
14, 2020.

What amount should be reported as profit before tax in the financial statements?

a. 2,000,000
b. 9,000,000
c. 4,000,000
d. 6,000,000
Problem 5-3

During 2019, Marian Company was sued by a competitor for P5,000,000 for
infringement of a patent.

Based on the advice of the legal counsel, the entity accrued the sum of P3,000,000 as a
provision in the financial statements for the year ended December 31, 2019.

Subsequently, on March 15, 2020, the Supreme Court decided in favor of the party
alleging infringement of the patent and ordered the defendant to pay the aggrieved party
a sum of P3,500,000.

The financial statements were prepared by the entity’s management on February 15,
2020 and approved by the board of directors on March 31, 2020.

What amount should be recognized as accrued liability on December 31, 2019?

a. 5,000,000
b. 3,500,000
c. 3,000,000
d. 1,500,000

Problem 5-4

Carla Company carried a provision of P2,000,000 in the draft financial statements for
the year ended December 31, 2019 in relation to an unresolved court case.

On January 31, 2020, when the financial statements for the year ended December 31,
2019 had not yet been authorized for issue, the case was settled and the court decided
the final total damages to be paid by the entity at P3,000,000.

What amount should be adjusted on December 31, 2019 in relation to this event?

a. 3,000,000
b. 2,000,000
c. 1,000,000
d. 0
Problem 5-5

Pink Company is completing the preparation of the draft financial statements for the
year ended December 31, 2019.

The financial statements are authorized for issued on March 31, 2020.

On January 31, 2020, a dividend of P2,000,000 was declared and a contractual profit
share payment of P200,000 was made, both based on the profit for the year ended
December 31, 2019.

On February 15, 2020, customer went into liquidation having owed the entity P900,000
for the past 5 months. No allowance had been made against this debt in the drat
financial statements.

On March 1, 2020, a manufacturing plant was destroyed by fire resulting in a financial

loss of P2,500,000.

What total amount should be recognized in profit or loss for the year ended December
31, 2019 to reflect adjusting events after the end of reporting period?

a. 2,000,000
b. 3,600,000
c. 2,500,000
d. 1,100,000

Problem 5-6

1. At the end of the current year reporting period, an entity carried a receivable from a
major customer who declared bankruptcy after the end of reporting period and
before the issuance of financial statements. What should be reported at the current
year-end?

a. Disclose the fact that the customer has declared bankruptcy.

b. Make a provision for the event after reporting period in the financial
statements
c. Ignore the event and wait for the outcome of the bankruptcy
d. Reverse the sale pertaining to the receivable in the comparative statement for
the prior period.

2. An entity decided to build and operate an amusement park next year. The entity
applied for a letter of guarantee which was issued before the issuance of the
 financial statements of the current year. What is the adjustment required at the
current year-end?

a. Book a long-term payable for the amount of guarantee.

b. Disclose the guarantee as a contingent liability.
c. Increase the contingency reserve.
d. Do nothing

3. An entity built a new factory building during the current year. Subsequent to the
current year-end and before issuance of financial statements, the building was
destroyed by fire and the claim against the insurance entity proved futile because
the cause of the fire was negligence on the part of caretaker of the building.
What should be reported at the current year-end?

a. Write off the carrying amount of the building

b. Make a provision for one-half of the carrying amount of the building
c. Make a provision for three-fourths of the carrying amount of the building
d. Disclose the nonadjusting event in the notes to financial statements.

4. An entity deals extensively with foreign currency transactions. Subsequent to the

end of reporting period and before the date of authorization of the issuance of the
financial statements, there were abnormal fluctuations in foreign currency rate. What
should be reported at the current year-end?

a. Adjust the foreign exchange year-end balances to reflect the abnormal adverse
fluctuations.
b. Adjust the foreign exchange year-end balances to reflect all abnormal
fluctuations and not just adverse movements.
c. Disclose the post-reporting period event.
d. Ignore the post-reporting period event.

5. Which statement is true in relation to events after reporting period?

a. Notes to the financial statements should give details of material adjusting

events included in those financial statements
b. Notes to the financial statements should give details of material nonadjusting
events which could influence the economic decisions of users
c. A decline in the market value of investments would normally be classified as an
adjusting event.
d. The settlement of a long-running court case would normally be classified as a
nonadjusting event.
Problem 5-7

1. Which event after the reporting period would require adjustment?

a. Loss of plant as a result of fire

b. Change in the market price of investment
c. Loss on inventory resulting from flood loss
d. Loss on a lawsuit the outcome of which was deemed uncertain at year-end

2. Events that occur after the current year-end but before the financial statements are
issued and affect the realizability of account receivable should be

a. Discussed only in the management annual report

b. Disclosed only in the notes to financial statements
c. Used to record an adjustments to bad debt expense
d. An adjustment directly to retained earnings

3. Nonadjusting events include all, except

a. A major business combination after reporting period

b. Announcing a plan to discontinue an operation
c. Expropriation of major asset after reporting period
d. Destruction of a major production plant by a fire before the end of the reporting
period

4. Nonadjusting events include all, except

a. The entity announced the discontinuation of an operation

b. The entity entered into an agreement to purchase the leased building
c. Destruction of a building by earthquake after the end of reporting period
d. A mistake in the calculation of allowance for uncollectible accounts
receivable.

5. Which event after the end of reporting period would generally require disclosure?

a. Retirement of key management personnel

b. Settlement of litigation when the event that gave rise to the litigation
occurred in a prior period.
c. Strike of employees
d. Issue of a large amount of ordinary shares