Long and Short,CPAs,were auditing Island Corporation for the year ended December 31,2017.On January 11,2018,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 8,2018.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 2018.
B)Treat the loss as a subsequent event and provide a footnote about the loss in the 2017 financial statements.
C)Treat the loss as a subsequent event and adjust the 2017 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 bankruptcy of a major customer is a subsequent event that provides evidence about a condition that did not exist at the balance sheet date. In this case, it is a non-adjusting subsequent event because it occurred after the balance sheet date but before the issuance of the financial statements. Long and Short, CPAs should disclose the loss in a footnote to the 2017 financial statements because it is material and relevant to users of the financial statements. Recording the loss in the 2018 financial statements as a routine transaction would not be appropriate because the loss occurred in 2017, and adjusting the 2017 financial statements to record the loss would be a violation of the accounting period concept. Filing a lawsuit against the customer is an option but not the best choice given that the customer has already declared bankruptcy, and the likelihood of collecting the money owed is low.

Long and Short,CPAs,were Auditing Island Corporation for the Year Ended