Final answer:
A Type II subsequent event requires disclosure in the footnotes of the financial statements, as it provides information about conditions that arose after the balance sheet date. Therefore, the correct option is: 3) disclosure in the footnotes.
Step-by-step explanation:
The student's question pertains to Type II subsequent events and their treatment in financial statements. In accounting, subsequent events are those events that occur after the balance sheet date but before the financial statements are issued or are available to be issued.
There are two types of subsequent events:
• Type I subsequent events provide additional information about conditions that existed at the date of the balance sheet and may require adjustments to the financial statements.
• Type II subsequent events provide information about conditions that arose after the balance sheet date and do not require adjustments to the financial statements.
For a Type II subsequent event, it does not affect the conditions at the balance sheet date but it is significant and can inform the users of the financial statements about events that could have a material effect on the future of the entity. Consequently, the appropriate action for a Type II subsequent event is disclosure in the footnotes of the financial statements. This aids users in understanding that there’s been a significant event that might affect their decision-making but did not materially exist as of the balance sheet date.