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CPA Financial Accounting and Reporting Far Quiz

CPA Financial Accounting and Reporting Far Quiz: Identify And Classify Subsequent Events

Practice Identify And Classify Subsequent Events in CPA Financial Accounting and Reporting Far with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

Question 1 / 20

0 of 20 answered

Which of the following best describes a recognized subsequent event (Type I)?

Select an answer to continue

What this quiz covers

This quiz focuses on Identify And Classify Subsequent Events, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA Financial Accounting and Reporting Far.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

Which of the following best describes a recognized subsequent event (Type I)?

  1. An event that provides evidence about conditions that did not exist at the date of the balance sheet but arose subsequent to that date.
  2. An event that is material in nature and requires pro forma financial statements to be presented.
  3. An event that provides additional evidence about conditions that existed at the date of the balance sheet. (correct answer)
  4. An event that occurs after the financial statements have been issued to external stakeholders.

Explanation: A recognized subsequent event, also known as a Type I event, provides new or better evidence about conditions that were already in existence at the balance sheet date. These events require an adjustment to the amounts in the financial statements. An example is the settlement of a lawsuit for a different amount than accrued, where the cause of the lawsuit existed at year-end.

Question 2

A non-recognized subsequent event (Type II) requires disclosure in the financial statements but no adjustment. What is the primary characteristic of such an event?

  1. It confirms a loss contingency that was previously deemed remote at the balance sheet date.
  2. It involves a change in an accounting estimate based on new information about conditions existing at the balance sheet date.
  3. It results from conditions that arose after the balance sheet date and did not exist at that date. (correct answer)
  4. It corrects a material error discovered from the prior year's financial statements.

Explanation: A non-recognized subsequent event, or Type II event, pertains to conditions that did not exist at the balance sheet date but arose afterward. These events do not result in adjustments to the financial statements but may require disclosure to prevent the financial statements from being misleading. Examples include fires, floods, or issuance of debt after the balance sheet date.

Question 3

A company has a significant accounts receivable balance from Customer Z at December 31, Year 1. On January 20, Year 2, before the issuance of the Year 1 financial statements, Customer Z declared bankruptcy. The customer's worsening financial condition was evident throughout the last quarter of Year 1. How should the company account for this event in its Year 1 financial statements?

How should the company account for this event in its Year 1 financial statements?

  1. Disclose the bankruptcy in the notes but make no adjustment to the financial statements.
  2. Record a loss in the Year 2 income statement.
  3. Adjust the Year 1 allowance for doubtful accounts to reflect the loss. (correct answer)
  4. Reclassify the receivable as a non-current asset.

Explanation: The customer's bankruptcy is a recognized (Type I) subsequent event because it confirms a condition—the customer's deteriorating financial health and the uncollectibility of the receivable—that existed at the December 31, Year 1 balance sheet date. Therefore, the company must adjust its Year 1 financial statements by increasing the allowance for doubtful accounts and recognizing the related bad debt expense in Year 1.

Question 4

A company's fiscal year-end is December 31, Year 1. On January 25, Year 2, a fire completely destroyed one of the company's manufacturing plants. The carrying amount of the plant was $5,000,000 and it was not insured. The financial statements for Year 1 were issued on March 1, Year 2.

What is the proper accounting treatment for the fire loss in the company's December 31, Year 1 financial statements?

  1. Record a loss of $5,000,000 on the Year 1 income statement.
  2. Disclose the nature of the event and the estimated financial impact in the notes to the Year 1 financial statements. (correct answer)
  3. Record the loss as a prior period adjustment to retained earnings.
  4. Neither adjust the financial statements nor provide any disclosure for the event.

Explanation: The fire is a non-recognized (Type II) subsequent event because the condition (the fire) did not exist at the balance sheet date. It arose entirely in the subsequent period. Therefore, no adjustment should be made to the Year 1 financial statements. However, because the loss is material, it must be disclosed in the notes to the Year 1 financial statements to prevent them from being misleading. The disclosure should include the nature of the event and an estimate of the financial effect.

Question 5

A company has a December 31 year-end. On February 1, Year 2, the company issued $10 million of 8% bonds payable at par. The financial statements for Year 1 were issued on March 15, Year 2.

How should the bond issuance be reflected in the December 31, Year 1 financial statements?

  1. The bond liability and related cash should be accrued on the December 31, Year 1 balance sheet.
  2. The transaction should be disclosed in the notes to the December 31, Year 1 financial statements. (correct answer)
  3. No recognition or disclosure is required in the Year 1 financial statements because the transaction occurred in Year 2.
  4. The transaction should be recorded as a prior period adjustment to retained earnings in the Year 1 financial statements.

Explanation: The issuance of bonds is a non-recognized (Type II) subsequent event because the obligation to repay the debt did not exist at the balance sheet date. The transaction does not affect the financial position at December 31, Year 1. However, a significant issuance of debt is typically a material event that should be disclosed in the notes to the Year 1 financial statements to inform users about significant changes in the company's capital structure.

Question 6

At its December 31, Year 1 year-end, a company was involved in litigation that it would probably lose. Management reasonably estimated the loss at $750,000 and accrued a contingent liability for this amount. On February 20, Year 2, before the Year 1 financial statements were issued, the lawsuit was settled for a final amount of $900,000.

What amount of loss from this lawsuit should be reported in the company's Year 1 income statement?

  1. $150,000
  2. $750,000
  3. $900,000 (correct answer)
  4. $0

Explanation: The settlement of the lawsuit is a recognized (Type I) subsequent event as it provides a more precise measurement of a condition that existed at the balance sheet date. Therefore, the financial statements for Year 1 must be adjusted to reflect the actual settlement amount. The total loss to be recognized in the Year 1 income statement is the full $900,000.

Question 7

At December 31, Year 1, a company had an accounts receivable balance from a specific customer, Alpha Co., of 120,000.Thecompany′soverallallowancefordoubtfulaccountswas120,000. The company's overall allowance for doubtful accounts was 120,000.Thecompany′soverallallowancefordoubtfulaccountswas40,000, but no specific allowance had been allocated to Alpha Co. On January 28, Year 2, before the Year 1 statements were issued, Alpha Co. declared bankruptcy. The company determined that the entire $120,000 was uncollectible, and Alpha's financial distress was evident throughout the last quarter of Year 1.

As a result of this subsequent event, what is the additional bad debt expense the company should recognize for Year 1?

  1. $120,000
  2. $80,000 (correct answer)
  3. $40,000
  4. $0

Explanation: Alpha Co.'s bankruptcy is a recognized (Type I) subsequent event because it confirms the uncollectibility of a receivable that existed at year-end, stemming from a condition (financial distress) that also existed at year-end. The company must adjust its Year 1 financials. The entire 120,000receivablefromAlphaisnowdeemeduncollectible.Sincethecompanyalreadyhasa120,000 receivable from Alpha is now deemed uncollectible. Since the company already has a 120,000receivablefromAlphaisnowdeemeduncollectible.Sincethecompanyalreadyhasa40,000 allowance for doubtful accounts that can be applied to this loss, the additional bad debt expense needed is 80,000(80,000 (80,000(120,000 total loss - $40,000 existing allowance).

Question 8

An SEC registrant has a fiscal year-end of December 31, Year 1. The audit of the financial statements was completed and the audit report was dated February 28, Year 2. The financial statements were filed with the SEC via Form 10-K on March 12, Year 2.

Under U.S. GAAP, through which date must the company evaluate subsequent events?

  1. December 31, Year 1
  2. February 28, Year 2
  3. March 12, Year 2 (correct answer)
  4. The date the 10-K is first read by an investor.

Explanation: For an SEC filer (a public business entity), subsequent events must be evaluated through the date the financial statements are issued. The date of issuance for an SEC filer is the date the financial statements are filed with the SEC. In this case, that date is March 12, Year 2.

Question 9

A company experiences a material subsequent event related to a condition that arose after the balance sheet date. If nondisclosure of the event would cause the financial statements to be misleading, which of the following is required?

  1. An adjustment to the financial statement balances and disclosure in the notes.
  2. Disclosure of the nature of the event and an estimate of its financial effect, or a statement that an estimate cannot be made. (correct answer)
  3. A pro forma presentation of the balance sheet only, as if the event had occurred at the balance sheet date.
  4. A retrospective restatement of the financial statements in the following reporting period.

Explanation: For a non-recognized (Type II) subsequent event, no adjustment is made to the financial statement balances. However, if the event is material and nondisclosure would make the financial statements misleading, the entity must disclose the nature of the event and an estimate of its financial effect. If an estimate cannot be made, a statement to that effect is required.

Question 10

At December 31, Year 1, a company had a $5 million note payable due on March 31, Year 2, which was classified as a current liability. On February 15, Year 2, before the Year 1 financial statements were issued, the company entered into a binding agreement with a lender to refinance the note on a long-term basis. The agreement allows the company to defer settlement for at least 12 months beyond the original due date.

How should the $5 million note be presented on the December 31, Year 1 balance sheet?

  1. As a current liability, with disclosure of the refinancing agreement.
  2. As a noncurrent liability, with disclosure of the refinancing agreement. (correct answer)
  3. As a current liability, with no disclosure required until the Year 2 financial statements.
  4. The liability should be removed from the balance sheet and disclosed only.

Explanation: Under U.S. GAAP, a short-term obligation may be reclassified as noncurrent if the company has the intent and ability to refinance it on a long-term basis. A binding refinancing agreement that is executed after the balance sheet date but before the financial statements are issued provides evidence of this ability. Therefore, the note should be reclassified as a noncurrent liability on the December 31, Year 1 balance sheet, and the nature of the agreement must be disclosed in the notes.

Question 11

A company's inventory at its December 31, Year 1 year-end had a carrying value of $800,000 based on cost. In January Year 2, before the Year 1 financial statements were issued, the entire inventory was sold to a single customer for $650,000. The sale was made at a discount because management identified a significant decline in demand for the product in late Year 1, making the inventory obsolete.

At what amount should the inventory be reported on the December 31, Year 1 balance sheet?

  1. $800,000
  2. $650,000 (correct answer)
  3. $150,000
  4. $0

Explanation: The sale of inventory after year-end for less than its carrying cost provides evidence of its net realizable value (NRV) at the balance sheet date. Since the cause of the discount (decline in demand and obsolescence) existed at year-end, this is a recognized (Type I) subsequent event. The inventory must be written down to its NRV at December 31, Year 1, which is best evidenced by the subsequent selling price of $650,000.

Question 12

A company with a December 31 year-end issued its financial statements on March 1, Year 2. On April 5, Year 2, the company lost a major lawsuit related to an event that occurred in Year 2. How should this event be treated?

How should this event be treated?

  1. As a recognized subsequent event in the Year 1 financial statements.
  2. As a non-recognized subsequent event in the Year 1 financial statements.
  3. As a prior period adjustment to the Year 1 financial statements.
  4. It is not a subsequent event for the Year 1 financial statements. (correct answer)

Explanation: The subsequent events period for the Year 1 financial statements ended on March 1, Year 2, the date the financial statements were issued. The lawsuit loss on April 5, Year 2 occurred after this period. Therefore, it is not a subsequent event for the Year 1 financial statements and requires no adjustment or disclosure in those statements. It is an event that will be accounted for in Year 2.

Question 13

After a company's balance sheet date but before the issuance of its financial statements, it entered into a significant, noncancelable purchase commitment for raw materials. The commitment will have a material effect on the company's future financial position.

How should this event be handled in the financial statements for the period just ended?

  1. The commitment should be accrued as a liability on the balance sheet.
  2. No adjustment should be made, but disclosure may be required. (correct answer)
  3. The financial statements for the prior period should be retrospectively adjusted.
  4. The commitment should be ignored until the goods are received in the next period.

Explanation: Entering into a significant purchase commitment after the balance sheet date is a non-recognized (Type II) subsequent event. The obligation arose after year-end. Therefore, no adjustment or accrual is made on the balance sheet for the period just ended. However, because the commitment is material, it should be disclosed in the notes to the financial statements to inform users of significant future obligations.

Question 14

For certain significant non-recognized subsequent events, such as a business combination or disposal of a subsidiary, what type of disclosure may be advisable in addition to the standard note disclosure?

  1. A separate press release issued concurrently with the financial statements.
  2. Pro forma financial statements giving effect to the event as if it had occurred at the balance sheet date. (correct answer)
  3. A retrospective restatement of the balance sheet and income statement.
  4. An independent appraisal report attached as an appendix to the financial statements.

Explanation: For some non-recognized subsequent events that are particularly significant (e.g., a major business combination, issuance of capital stock, or disposal of a significant part of the business), providing supplemental pro forma financial information can be very useful for financial statement users. This pro forma data presents the financial statements 'as if' the event had occurred at the balance sheet date, providing insight into the future impact of the event.

Question 15

A private company has a fiscal year-end of September 30, Year 1. Its financial statements were approved by management and made available to be issued on November 15, Year 1. An SEC filer has the same fiscal year-end, but it filed its Form 10-K on December 5, Year 1.

What is the primary difference in the subsequent events evaluation period for these two entities?

  1. The SEC filer must evaluate events for a longer period than the private company. (correct answer)
  2. The private company must evaluate events for a longer period than the SEC filer.
  3. Both entities must evaluate events through the same date, November 15, Year 1.
  4. There is no difference in the evaluation period required under U.S. GAAP.

Explanation: The private company evaluates subsequent events through the date the financials are available to be issued (November 15, Year 1). The SEC filer must evaluate subsequent events through the date the financials are issued, which is the date of filing with the SEC (December 5, Year 1). Therefore, the SEC filer must evaluate events for a longer period.

Question 16

A company with a December 31 year-end declared a cash dividend on January 15, Year 2, payable on February 10, Year 2, to shareholders of record on January 31, Year 2. The company's Year 1 financial statements were issued on March 1, Year 2.

How should the declaration of the dividend be treated in the December 31, Year 1 financial statements?

  1. The dividend payable should be accrued as a current liability.
  2. The dividend should be recorded as a reduction of retained earnings.
  3. The dividend declaration requires disclosure but no adjustment. (correct answer)
  4. No disclosure or adjustment is required.

Explanation: The declaration of a dividend after the balance sheet date is a non-recognized (Type II) subsequent event. The obligation to pay the dividend did not exist at December 31, Year 1; it was created by the board's action on January 15, Year 2. Therefore, no accrual or adjustment to retained earnings is made in the Year 1 financial statements. However, if the dividend is significant, it may require disclosure in the notes.

Question 17

A private company has a December 31, Year 1 year-end. The company's management approved the financial statements for issuance on February 25, Year 2. The financial statements were subsequently distributed to the company's lenders on March 5, Year 2.

What is the latest date through which the company must evaluate subsequent events?

  1. December 31, Year 1
  2. February 25, Year 2 (correct answer)
  3. March 5, Year 2
  4. The date the audit report is signed.

Explanation: For entities other than SEC filers (e.g., private companies), subsequent events must be evaluated through the date the financial statements are available to be issued. This is the date when the statements are complete in a form that complies with GAAP and all necessary approvals for issuance have been obtained. In this scenario, that date is February 25, Year 2.

Question 18

In addition to the accounting for recognized and non-recognized events, U.S. GAAP requires a specific disclosure in the notes to the financial statements regarding the subsequent events evaluation process itself. Which of the following disclosures is required?

  1. The name of the manager responsible for the subsequent events review.
  2. A detailed description of the procedures performed to identify subsequent events.
  3. The date through which subsequent events have been evaluated. (correct answer)
  4. A statement confirming that no material uncorrected misstatements were found during the evaluation.

Explanation: U.S. GAAP requires that an entity disclose the date through which subsequent events have been evaluated. This informs users of the financial statements about the time frame that management has considered for potential adjustments or disclosures. For SEC filers, this is the date of issuance; for others, it is the date the financials are available to be issued.

Question 19

At December 31, Year 1, a company held a portfolio of marketable equity securities, which are measured at fair value through net income. The fair value of the portfolio on that date was $2,000,000. On January 30, Year 2, due to an unexpected political event, the stock market experienced a sharp decline, and the value of the company's portfolio fell to $1,500,000. The company issued its financial statements on March 5, Year 2.

What is the appropriate accounting treatment for the decline in market value in the company's Year 1 financial statements?

  1. Adjust the carrying value of the securities to $1,500,000 on the December 31, Year 1 balance sheet.
  2. Report the securities at $2,000,000 on the balance sheet and disclose the post-balance-sheet decline in value. (correct answer)
  3. Recognize a $500,000 loss in the Year 1 income statement and report the securities at $1,500,000.
  4. Make no adjustment or disclosure because the loss will be recognized in Year 2 when it occurs.

Explanation: The decline in market value is a non-recognized (Type II) subsequent event because it was caused by an event (the political event) that occurred after the balance sheet date. The value at December 31, Year 1 was correct based on conditions existing at that time. Therefore, the Year 1 balance sheet should not be adjusted. However, the decline is material and should be disclosed in the notes to the financial statements.

Question 20

On February 15, Year 2, a company acquired 100% of the net assets of a competitor in a business combination. The company's fiscal year ended on December 31, Year 1, and its financial statements were issued on March 31, Year 2.

What is the proper accounting for the business combination in the acquirer's December 31, Year 1 financial statements?

  1. No recognition or disclosure is needed because the transaction is unrelated to Year 1 operations.
  2. The acquisition should be retrospectively applied, and the competitor's assets and liabilities should be consolidated as of December 31, Year 1.
  3. Disclosure in the notes to the financial statements is required, but no adjustment to the financial statement balances should be made. (correct answer)
  4. The acquisition should be recorded as an adjustment to retained earnings in the Year 1 statement of changes in equity.

Explanation: A business combination that occurs after the balance sheet date is a classic example of a non-recognized (Type II) subsequent event. The conditions for the combination did not exist at December 31, Year 1. Therefore, the acquirer's Year 1 financial statements are not adjusted. However, because a business combination is a significant event, it must be disclosed in the notes to the Year 1 financial statements.