In connection with your audit of the financial statements of Hollis Mf. Corporat

Question

In connection with your audit of the financial statements of Hollis Mf. Corporation for the year ended December 31, 203, your review of subsequent events disclosed the following items. For each of the subsequent events identified, indicate whether they should result in: Adjustment – An adjustment as of 20X3. Disclosure – Note disclosure as of 20X3. No Disclosure – No disclosure nor adjustment as of 20X3. 1.7.20X4: The mineral content of a shipment of ore en route to Hollis Mfg. Corporation on 12.31.X3, was determined to be 72%. The shipment was recorded at year-end at an estimated content of 50% by a debit to Raw Materials Inventory and a credit to Accounts Payable in the amount of $82,400. The final liability to the vendor is based on the actual mineral content of the shipment. 15.20X4: Following a series of personal disagreement s between Ra Hollis, the president, and his brother-in-law, the treasurer, the later resigned, effective immediately, under an agreement whereby the corporation would purchase his 10% stock ownership at book value as of 12.31.X3. Payment is to be made in two equal amounts in cash on April 1 and October 1, 20X4. In December, the treasurer had obtained a divorce from his wife, who is Ray Hollis’s sister. 6.20X4: As a result of reduced sales, production was curtailed in mid-January and some workers were laid off. On 1.18.20X4, a major customer filed for bankruptcy. The customer’s financial condition had been degenerating over recent years. On 1.28.20X4, a famous analyst who followed the industry provided a negative report on his expectations concerning the short and intermediate term for the industry.

Explanation / Answer

1. Event 1 . is adjusting event. The ending inventory needs to be reviced with a value of 72% mineral content as a measure of conservatism. So 22% additional raw material inventory and accounts payable amount to be recorded.

2.As the share payments for Controllers resignation to be made in X4 and the condition did not exist on 12.31.X3, it is non adjusting event. No disclosure required and no adjustment required.

3.Production loss and worker laying off are routine operational matters and needs no diclosure and ano adjustment.

4. The bankruptcy condition of the major customer existed before 12.31.X3. So the account receivable and bad debt expense to be adjusted as an effect of the banruptcy. It is an adjusting event.

5. The negative report of bthe famous analyst is about the industry as a whole and doed not need any disclosure and does not need any adjustment.

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