16-39 Adapted AICPA Task-Based Simulation In connection with her audit of the fi

Question

16-39 Adapted AICPA Task-Based Simulation

In connection with her audit of the financial statement of Flowmeter, Inc., for the year ended December 31, 20X3, Joan Hirsch, CPA, is aware that certain events and transactions that have taken place after December 31, 20X3, but before she has is sued her report dated February 28, 20X4, may affect the company's financial statements.

The following material events or transactions have come to her attention:

On January 3, 20X4, Flowmeter, Inc., received a shipment of raw material from Canada. The materials had been ordered in October 20X3 and shipped FOB shipping point in December 20X3.

On January 15, 20X4, the company settled and paid a personal injury claim of a former employee a the re u lt of an accident that had occurred in March 20X3. The company had not previously recorded a liability for the claim.

On January 25, 20X4, the company agreed to purchase for cash the outstanding stock of Porter Electrical Co. The business combination is likely to double the sales volume of Flowmeter, Inc.

d. On February l , 20X4, a plant owned by Flowmeter, Inc., was damaged by a flood, resulting in an uninsured Loss of inventory.

e. On February 5, 20X4, Flowmeter, Inc., is used to an underwriting syndicate $2 million in convertible bonds.

REQUIRED:

1. For each of the subsequent events, indicate whether they should result in: Adjustment-an adjusting entry as of 20X3.

2. Possible Disclosure Consider note disclosure as of 20X3.

Explanation / Answer

a. Adjustment

On Dec 31, the raw material is in transit and on jan 3 shipment is received. The financial statement should be adjusted because of this new information. The adjustment consists of increase in inventories and recording of liability.

b. Adjustment

A liability is appeared when an accident occurs so on march,2013. But it is accrued . Now the liability is paid therefore the financial statement should be adjusted.

c. Disclosure

Disclosure of new business acquired is necessary to prevent the financial statement from being misleading.

d. Disclosure

Disclosure of damages caused by the flood is necessary to prevent the financial statement from being misleading.

e. Disclosure

Disclosure of sale of convertible bonds is necessary to prevent the financial statement from being misleading.

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