Question

Please don not copy solutions in the text book .

At December 31, 2020, Bouvier Corp. has assets of $10 million, liabilities of $6 million, common shares of $2 million (representing 2 million common shares of $1.00 par), and retained earnings of $2 million. Net sales for the year 2020 were $18 million, and net income was $800,000. As one of the auditors of this company, you are making a review of subsequent events on February 13, 2021, and you find the following.

1)

On February 3, 2021, one of Bouvier's customers declared bankruptcy. At December 31, 2020, this company owed Bouvier $300,000, of which $40,000 was paid in January 2021.

2

On January 18, 2021, one of the client's three major plants burned. Bouvier has fire insurance coverage.

3

On January 23, 2021, a strike was called at one of Bouvier's largest plants and it halted 30% of 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 Bouvier'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 Bouvier's products, but at a price 30% lower. Bouvier officials say they will meet the lower prices, which are barely high enough to cover variable and fixed manufacturing and selling costs.

5)

Merchandise traded in the open market is recorded in the company's records at $1.40 per unit on December 31, 2020. This price held for two weeks after the release of an official market report that predicted vastly excessive supplies; however, no purchases were made at $1.40. The price throughout the preceding year had been about $2.00, which was the level experienced over several years. On January 18, 2021, the price returned to $2.00 after public disclosure of an error in the official calculations of the prior December—the correction erased the expectations of excessive supplies. Inventory at December 31, 2020, was on a lower of cost and net realizable value basis.

6)

On February 1, 2021, the board of directors adopted a resolution to accept the offer of an investment banker to guarantee the marketing of $1.2 million of preferred shares. The company owns equity investments classified as current assets accounted for using the fair value through net income model. The investments have been adjusted to fair value as at December 31, 2020.

7

On January 21, 2021, the annual report of one of the investment companies has been issued for its year ended November 30, 2020. The investee company did not meet its earnings forecasts and the market price of the investment dropped from $49 per share at December 31, 2020, to $27 per share on January 21, 2021

Instructions

For each event, state how it will affect the 2020 financial statements, if at all. The company follows IFRS

Answer 1

In the given case of Bouvier Corp,the auditor shall follow IAS 10:Events after the reporting period to make a review of subsequent events on 13th February 2021 and its effect on the 2020 financial statements.

According to IAS 10, the subsequent events shall either be adjusting events that require adjustments in the amounts recorded in the financial statement or disclosures to reflect the relevant events.Adjusting events are those subsequent events that provide evidence of conditions that existed at the end of the reporting period.Subsequent events can also be non adjusting events which are events that do not provide evidence of conditions that existed at the end of reporting period.These events do not require adjustment in the amounts recorded in financial statements.

Accordingly the subsequent events of Bouvier Corp shall be dealt with-

1)On 3rd February one customer declared bankrupty and $40000 was received out of total receivable of $300000.This is an adjusting event as the receipt of information that the customer has become bankrupt is an adjusting event after the reporting period because the customer's bankruptcy after the end of the reporting period is due to the culmination of a sequence of events that started before the reporting date.Hence a provision for bad debt of $300000 shall be recorded and asset shall be reduced by $300000.

2)One of Bouvier Corp's 3 major plants burned.Given the client has fire insurance it is a non adjusting event as the destruction of one production plant does not affect the going concern assumption.Hence this subsequent event only requires a disclosure.

3)A major strike occured that halted production upto 30% and is still unresolved is a non adjusting event as the conditions did not pre exist at the reporting date,however a disclosure is required as it occured shortly after on plant burned down and its cumulative affect might threaten the company to bankruptcy.

4)Emergence of competition is a non adjusting event that requires disclosure because it will cause the client's position in the market from a profit making company to a company that is breaking even.

5)Merchandise traded in the open market is recorded in the company's records at $1.40 per unit on December 31, 2020. This price held for two weeks after the release of an official market report that predicted vastly excessive supplies. On January 18, 2021, the price returned to $2.00 after public disclosure of an error in the official calculations of the prior December—the correction erased the expectations of excessive supplies.This is an adjusting event as the change in price is due to an error that occured during the reporting period.Given that inventory is valued at cost or nrv whichver is lower, assuming the cost is lower than $2,no adjustment shall be made to the value of inventory.

6) On February 1, 2021, the board of directors adopted a resolution to accept the offer of an investment banker to guarantee the marketing of $1.2 million of preferred shares. The company owns equity investments classified as current assets accounted for using the fair value through net income model. The investments have been adjusted to fair value as at December 31, 2020.This is a non adjusting event as no conditions existed on the reporting date,however a disclosure is required due to materiality of the transaction.

7) The market price of one of the investment dropped from $49 per share at December 31, 2020, to $27 per share on January 21, 2021.This is an adjusting event as this information shows that the value of an asset has decreased and due to the company following fair value through net income model for investments,a reduction of $22 per share shall be made in the fianancial statements and the net income shall also reduce by the same amount.