Question

Shortly after year-end Zero Corporation was informed of the bankruptcy of Bingo. Zero Corporation showed a receivable of $10,000 due from Bingo as of year-end—none of which seems recoverable. The receivable had been questionable for some time as Bingo had been experiencing financial difficulties for the past several years. Yet, Bingo's bankruptcy did not occur until after Zero Corporation's year-end. Under these circumstances:

a-The Financial Statement should be adjusted: YES NO
b-The Event requires Financial Statement disclosure, but no adjustment: YES NO
c-The Auditor's report should be modified for the lack of consistency. YES NO

Answer 1

An adjustment to the Financial Statement is required if the information brings to light conditions that existed at the balance sheet date, such as a foreseeable uncollectible debt. Disclosure alone is not sufficient, and the Auditor's report does not need to be modified for consistency in this case.

Step-by-step explanation:

In the situation where Zero Corporation has a receivable of $10,000 from Bingo, who is now bankrupt but the bankruptcy occurred after year-end, different actions need to be considered based on accounting principles. Since the receivable was already questionable before year-end, the following applies:

• a-The Financial Statement should be adjusted: YES - An adjustment is typically required in this situation because it reflects new information about conditions that existed at the balance sheet date. An allowance for doubtful accounts should be recognized, reducing the receivable to the amount that is expected to be collected.
• b-The Event requires Financial Statement disclosure, but no adjustment: NO - Disclosure alone is insufficient since this event provides additional evidence about conditions that existed at the date of the balance sheet. An adjustment is necessary rather than just disclosure.
• c-The Auditor's report should be modified for the lack of consistency: NO - A modification for lack of consistency is not typically warranted here, as this situation does not concern the consistency of accounting policies, but rather the recognition of an event that affects the valuation of existing assets.

However, if the financial difficulty of Bingo was not known until after the balance sheet date, no adjustment would be necessary, only disclosure. It is important to determine whether the bad debt was foreseeable before the balance sheet date or not. Therefore, proper investigation and judgment must be applied in this scenario.