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Post Balance Sheet Events: Treatment in financial statements

At December 31, 2010, Coburn Corp. has assets of $10,000,000, liabilities of $6,000,000, common stock of $2,000,000 (representing 2,000,000 shares of $1 par common stock), and retained earnings of $2,000,000. Net sales for the year 2010 were $18,000,000, and net income was $800,000.

As auditors of this company, you are making a review of subsequent events on February 13, 2011, and you find the following.

1. On February 3, 2011, one of Coburn's customers declared bankruptcy. At December 31, 2010, this
company owed Coburn $300,000, of which $60,000 was paid in January, 2011.

2. On January 18, 2011, one of the three major plants of the client burned.

3. On January 23, 2011, a strike was called at one of Coburn's largest plants, which halted 30% of its
production. As of today (February 13) the strike has not been settled.

4. A major electronics enterprise has introduced a line of products that would compete directly with
Coburn's primary line, now being produced in a specially designed new plant. Because of manufacturing
innovations, the competitor has been able to achieve quality similar to that of Coburn's
products, but at a price 50% lower. Coburn officials say they will meet the lower prices, which are
high enough to cover variable manufacturing and selling costs but which permit recovery of only
a portion of fixed costs.

5. Merchandise traded in the open market is recorded in the companyâ's records at $1.40 per unit on
December 31, 2010. This price had prevailed for 2 weeks, after release of an official market report
that predicted vastly enlarged supplies; however, no purchases were made at $1.40. The price
throughout the preceding year had been about $2, which was the level experienced over several
years. On January 18, 2011, the price returned to $2, after public disclosure of an error in the official
calculations of the prior December, correction of which destroyed the expectations of excessive
supplies. Inventory at December 31, 2010, was on a lower-of-cost-or-market basis.

6. On February 1, 2011, the board of directors adopted a resolution accepting the offer of an investment
banker to guarantee the marketing of $1,200,000 of preferred stock.

Solution Preview

FASB Statement No. 165 sets standards for the disclosure of events that occur after the balance sheet date but before the financial statements are issued. Subsequent events are classified as two major types:

Type 1-Events that reveal conditions existing at or before the balance sheet date and require adjustment to the financial statements.

Type 2-Events that reveal conditions arising after the balance sheet date and require disclosure in, but not ...

Solution Summary

In a 299 word solution, each circumstance is explained in a sentence or two following the FASB statement for disclosure of events subsequent to the balance sheet date.