CE On Events After The Reporting Period

CLASSROOM EXERCISES ON EVENTS AFTER THE REPORTING PERIOD
For each of the following situations, determine whether the case requires and adjustment of the financial
statements or disclosure.
Situation 1
Boyce Co. gives warranties at the time of sale to its purchasers. On December 31, 2017 it assessed its warranty
obligation to be P100,000. Immediately before the 2017 financial statements were authorized for issue, the entity
discovered a latent defect in one of its lines of products (i.e. a defect that was not discoverable by reasonable or
customary inspection).
Situation 2
On March 1, 2018 Harmony Corp.’s financial statements for the year ended Dec. 31, 2017 were authorized for
issue. At December 31, 2017 the entity had a significant unhedged foreign currency exposure. By March 1, 2018
a significant loss had been incurred on these exposures because of a material weakening of the entity’s functional
currency against the foreign currencies to which it is exposed.
Situation 3a
On March 1, 2018 Eads Co.’s financial statements for the year ended December 31, 2017 were authorized for
issue. On February 1, 2018 a competitor agreed to settle a claim by the entity for breach of one of its patents. Eads
opened the case against the competitor in 2017. However, the competitor had disputed the entity’s case.
Situation 3b
Suppose that instead of the competitor agreeing to settle on March 1, 2018, on that date a jury found the
competitor liable for the amount of Eads’s claim. However, the competitor has a right to appeal the jury decision
to a higher court and has indicated its intention to do so.
Situation 4
On February 28, 2018 Oaf Inc.’s financial statements for the year ended December 31, 2017 were authorized for
issue. The entity sells some products on credit to a customer before December 31, 2017. At December 31, 2017
the entity’s management had no doubt about the customer’s ability to pay the outstanding trade receivable of
P200,000. However, in February 1, 2018, during the process of finalizing the financial statements, Oaf was
informed the customer is going into liquidation because it has significant debt, has virtually no cash inflows, and
its accounting records are poorly maintained.
Situation 5
In March 2018 Morrison Co. discovers that an error was made in the inventory reported in its statement of
financial position at December 31, 2016, resulting in an overstatement of income for that year. No error was made
in the inventory that was reported for December 31, 2017.
Situation 6
Darin Corp.’s financial statements for the year ended December 31, 2013 were authorized for issue on February
28, 2014. On February 28, 2014 a fire destroyed one of the entity’s paper manufacturing plants, which had a
carrying amount of P50 million in the entity’s statement of financial position at December 31, 2013. Darin has no
insurance against fire damage.
Situation 7
On January 20, 2014, before Knox Inc.’s December 31, 2013 financial statements were authorized for issue, a
court ordered the entity to pay P120,000 damages in full and final settlement of a patent infringement lawsuit
brought against the entity by one of its competitors. The patent infringement occurred during 2012. The amount of
damages awarded to the competitor was significantly higher than the P10,000–PU30,000 that Knox had
justifiably expected to pay. However, the entity will not contest the judgement. In its December 31, 2012 annual
financial statements the entity reported its liability for the lawsuit at P20,000—this estimate was made in good
faith and taking account of all available evidence.
Situation 8
On January 20, 2014, before Lykke Co. ’s 31 December 2013 financial statements were authorized for issue, a
court ordered that entity to pay P120,000 damages in full and final settlement of a patent infringement lawsuit
brought against the entity by one of its competitors. The patent infringement occurred in 2012. The amount of
damages awarded to the competitor was consistent with similar cases settled in that jurisdiction since 2011.
In its December 31, 2013 annual financial statements the entity reported its liability for the lawsuit at P20,000. At
the time of approving its 2013 financial statements the entity deliberately understated the amount presented,
because it did not want to make public its true estimate, believing that this would be detrimental to the entity’s
defense.
Situation 9
On October 14, 2013, a material fraud was discovered by the bookkeeper of Capital Cities Corp. The payables
ledger assistant had been diverting funds into a fictitious supplier bank account, set up by the employee, which
had been occurring for the past six months. The employee was immediately dismissed, legal proceedings against
the employee have been initiated and the employee’s final wages have been withheld as part-reimbursement back
to the company.
Situation 10
On November 19, 2013, a customer ceased trading due to financial difficulties owing P25,000. As the financial
statements are needed for the board meeting on November 22, 2013, you have decided that because the amount is
immaterial, no adjustment is required. The auditors have also confirmed that this amount is immaterial to the draft
financial statements.

CE On Events After The Reporting Period

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CLASSROOM EXERCISES ON EVENTS AFTER THE REPORTING PERIOD

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