Question

Zero Corp. suffered a loss on an uncollectible trade account receivable due to a customer's bankruptcy that would have a material effect on its financial statements. This occurred suddenly due to a natural disaster ten days date, but one month before the issuance of the financial statements. Under these circumstances, the financial statements

a. Should be adjusted, but should not disclose the event

b. Should not be adjusted, but should disclose the event

c. Should not be adjusted should not disclose the event

d. Should be adjusted and should disclose the event

Answer 1

b. Should not be adjusted, but should disclose the event

Explanation:

Certain subsequent events may provide additional evidence aboutconditions at the date of the balance sheet and affect estimates inherent in the preparation ofstatements. These events require adjustment by the client in the financial statements at year-end.Other subsequent events provide evidence about conditions not existing at the date of the balancesheet but arising subsequent to that date and affecting the interpretation of the year-end financialstatements. These events may require disclosure in notes to the financial statements but do notrequire adjustment of the financial statement balances. Thus, in this case, the financial statements should not be adjusted, but disclosure should be made in the notes. The auditor's report isunaffected.