Question

Which of the following would be a Type II subsequent event?

a. Information becomes available that provides evidence about the valuation of an estimate or reserve that had been accrued at year-end.

b. A sale of inventory below carrying value provides evidence that the net realizable value was less than cost at year-end.

c. A stock dividend or split that takes place during the subsequent period should be disclosed. In addition, earnings-per-share figures should be adjusted to show the retroactive effect of the stock dividend or split.

d. A material change occurs in the value of investment securities after the balance sheet date

Answer 1

Option d, a material change in the value of investment securities after the balance sheet date, is a Type II subsequent event because it reflects conditions that did not exist at the year-end but arose after that date.

Step-by-step explanation:

The question pertains to the identification of a Type II subsequent event. A Type II subsequent event refers to an event that provides evidence about conditions that did not exist at the date of the balance sheet but arose subsequent to that date. Among the options provided:

• Option a refers to information becoming available after the year-end but before the financial statements are issued or available to be issued, which affects estate estimates known at the year-end. This is a Type I subsequent event.
• Option b, a sale of inventory below carrying value, suggesting that the net realizable value was less than cost at the year-end, is a Type I subsequent event because it provides evidence about conditions that existed at the balance sheet date.
• Option c pertains to stock dividends or splits that should be disclosed but do not reflect financial conditions at the balance sheet date.
• Option d, a material change in the value of investment securities after the balance sheet date, is a Type II subsequent event. It represents something that occurred after the year-end, and although it may affect the current or future value, it does not provide evidence about conditions at the year-end.

Therefore, the correct answer to the student's question is option d.