Question

The following events and transactions related to David Company ocurred after the balance sheet date of December 31, 2017, and before the financial statements were issued in 2018. None of the items is reflected in the financial statements as of December 31, 2017.

1. In order to secure a bank loan of $200,00, David pleged as collateral certain fixed assets wth a net book value of $300,000. David applied for the loan December 18, 2017, and the bank approved the loan on January 8, 2018.
2. On Nover 21, 2017, David initiated a lawsuit seeking $500,000 in damages from a firm that David claims infringed on its trademake. David's attorneys have stated that the chances of wining and of getting the $500,000 are excellent.
3. On February 22, 2018, David issued bonds at an interest rate 2 percentage points above the LIBOR (London Interbank Offered Rate). This is the average interest rate estimated by leading banks in London that they would be charged if borrowing from other banks.
4. A warehouse containing a significant portion of David's inventory was destroyed by fire on January 30, 2018.
5. A supplier to whom David owes $15,000 declared bankruptcy on February 3, 2018.
Required: Indicate whether the item would be reported in David Company's financial statements or in the notes to the financial statements, and what information would be reported. Assume that each of these events is considered material.

Answer 1

1. In order to secure a bank loan of $200,00, David pleged as collateral certain fixed assets wth a net book value of $300,000. David applied for the loan December 18, 2017, and the bank approved the loan on January 8, 2018.

DISCLOSED ON THE NOTES

the company should disclose the fact that fixed assets were used as collateral for a bank loan.

2. On November 21, 2017, David initiated a lawsuit seeking $500,000 in damages from a firm that David claims infringed on its trademark. David's attorneys have stated that the chances of wining and of getting the $500,000 are excellent.

DISCLOSED ON THE NOTES

since the chance of winning are excellent, very likely, the lawsuit should be disclosed

3. On February 22, 2018, David issued bonds at an interest rate 2 percentage points above the LIBOR (London Interbank Offered Rate). This is the average interest rate estimated by leading banks in London that they would be charged if borrowing from other banks.

REPORTED IN THE FINANCIAL STATEMENTS

this involves liabilities and expenses that must be reported

4. A warehouse containing a significant portion of David's inventory was destroyed by fire on January 30, 2018.

REPORTED IN THE FINANCIAL STATEMENTS

the loss has to be reported

5. A supplier to whom David owes $15,000 declared bankruptcy on February 3, 2018.

REPORTED IN THE FINANCIAL STATEMENTS

the $15,000 loss has to be reported