Long and Short, CPAs, were auditing Island Corporation for the year ended December 31, 2020. On January 11, 2021, a major customer of Island Corporation declared bankruptcy as the result of an uninsured loss due to a major fire in their warehouse on January 8, 2021. As a result, a material accounts receivable from the customer was determined to be uncollectible. Long and Short, CPAs, would expect the client to
A)record the loss on uncollectible accounts as a routine transaction in the year 2021.
B)treat the loss as a subsequent event and provide a footnote about the loss in the 2020 financial statements.
C)treat the loss as a subsequent event and adjust the 2020 financial statements to record the loss on uncollectible accounts.
D)file a lawsuit against the customer in hopes of collecting some of the money owed to the client.

Question

Quizplus · Accepted Answer

The loss is considered a subsequent event that provides additional information about conditions that existed at the balance sheet date. Since the customer's bankruptcy (which led to the accounts receivable being uncollectible) occurred after the balance sheet date but was related to conditions existing at the balance sheet date, it should be disclosed in the footnotes of the 2020 financial statements without adjusting the financial statements themselves.

Long and Short, CPAs, Were Auditing Island Corporation for the Year