Question

Which one of the following subsequent events will least likely result in an adjustment to the financial statements?

a. A material change in the amount of settlement of a lawsuit which had been estimated at year-end.

b. Bankruptcy of a customer who owes your client a material amount on open account at year-end for which there is an inadequate allowance estimate.

c. Sale of a large block of inventory at a price materially below carrying value.

d. Signing of a letter-of-intent by the client to acquire 55% of another entity for stock.

Answer 1

The signing of a letter-of-intent to acquire a significant percentage of another entity for stock is the event least likely to require adjustment to financial statements since the transaction is not completed and does not affect the current period's financials.

Step-by-step explanation:

When considering which of the following events would least likely require an adjustment to the financial statements, the correct answer is d. Signing of a letter-of-intent by the client to acquire 55% of another entity for stock. Such an event is indicative of a future business combination, and while it may be significant, it does not immediately affect the financial statements for the period before the letter-of-intent was signed since the transaction has not yet been completed.

In contrary, the other events listed, such as a material change in the amount of settlement of a lawsuit (a), bankruptcy of a customer with an inadequate allowance estimate (b), and the sale of inventory at a price below carrying value (c), can all require adjustments to the financial statements if they provide new information about conditions that existed at the balance sheet date. For example, a lawsuit settlement or customer bankruptcy could lead to loss recognition or increased allowance for doubtful accounts.