Final answer:
The correct answer is option 1. An adjustment to or disclosure in financial statements is warranted for the bankruptcy of a major customer, a material event affecting future cash flows. Merger discussions and patent applications may also require disclosure if material and confirmed, while potential sales growth discussions are speculative and may not be disclosed until an agreement is reached.
Step-by-step explanation:
The situation that would require adjustment to or disclosure in the financial statements is the bankruptcy of a customer who regularly purchased 30 percent of the company's output. This is a significant event because it directly impacts the entity's financial stability and future cash flows. An entity's financial statements must provide a true and fair view of its financial position, and such a major event could be material to the financial statements.
Mergers and discussions regarding a merger need to be disclosed only when they are confirmed and have a significant probability of occurrence that can affect the investor's decision-making. Since a merger directly impacts the entity's structure, market share, and financial position, it is critical to disclose such information.
Similarly, the application for a patent might have future financial benefits, and if such an application is material to the business, it should be disclosed as it could affect the value and operation of the company.
Discussions leading to potential growth in sales could represent a significant change in operations but would likely not be disclosed until an agreement is reached, as it could be speculative.