question archive Russia Company provided the following information on December 31, 2021: Jan
Russia Company provided the following information on December 31, 2021: Jan
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Russia Company provided the following information on December 31, 2021: Jan. 15, 2022 - P3,000,000 of accounts receivable was written off due to the bankruptcy of a major customer; Feb. 14, 2022 - A shipping vessel of Russia with carrying amount of P5,000,000 was completely lost at sea because of a hurricane; March 11, 2022 - A court case involving Russia as the defendant was settled and the entity was obligated to pay the plaintiff P1,500,000. Russia previously recognized a P1,000,000 liability for the suit because management deemed it probable that the entity would lose the case; March 25, 2022 - One of Russia's factories with a carrying amount of P15,000,000 was completely razed by forest fires that erupted in its vicinity. The management of the entity completed the draft of the financial statements for 2021 on February 10, 2022. On March 20, 2022, the board of directors authorized the financial statements for issue. The entity announced the profit and other selected information on March 22, 2022. The financial statements were made available to shareholders on April 2, 2022 at the annual shareholders' meeting where the financial statements were approved. The financial statements were filed with the regulatory agency the very next day.
1. Using the information on Russia Company. What are the necessary disclosures to reflect in the financial statements?
a. About the shipping vessel owned by Russia which was lost at sea only.
b. About the factory destroyed by fire only.
c. Disclose both the shipping vessel which was lost at sea and the factory destroyed by fire.
d. There is nothing to disclose
2. Still using with Russia Company. What is the adjusting entry to record the event on Jan. 15, 2022?
a. Debit Doubtful accounts expense and credit Allowance for doubtful accounts for 3,000,000
b. Debit Allowance for doubtful accounts and credit Accounts receivable for 3,000,000
c. An adjusting entry is not necessary because this is not an adjusting event.
d. None of the above
3. In Russia Company, what is the adjusting entry for the event on March 11, 2022?
a. Debit Loss on lawsuit and credit Estimated liability for 1,500,000
b. Debit Loss on lawsuit and credit Estimated liability for 1,000,000
c. Debit Loss on lawsuit and credit Estimated liability for 500,000
d. none of the above
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Summary of Answers:
1. c. Disclose both the shipping vessel which was lost at sea and the factory destroyed by fire.
2. c. An adjusting entry is not necessary because this is not an adjusting event.
3. c. Debit Loss on lawsuit and credit Estimated liability for 500,000
Step-by-step explanation
For item number 1:
The event about the shipping vessel of Russia that was completely lost at sea because of a hurricane in Feb. 14, 2022 amounting to P5,000,000 and the fire in March 25, 2022 on one of Russia's factories with a carrying amount of P15,000,000 are events that have significance among the readers of the Financial Statements like stakeholders and others. Hence, it should be both added as a disclosure in the notes to FS.
For item number 2:
The accounts receivable that was written off due to the bankruptcy of a major customer in January 15, 2022 amounting to P3,000,000 is not an adjusting event. It should be an entry of Debit Doubtful accounts expense and credit Allowance for doubtful accounts for 3,000,000 for the journal entries for the year 2022, not as an adjustment for year 2021 because there is not an indication of accounts receivable written off as of the Balance Sheet date.
For item number 3:
Because there is a stated indication that there is an adjusting event that occurs after the Balance Sheet date but before the issuance of the Financial Statements, an entry of Debit Loss on lawsuit and credit Estimated liability for 500,000 will be an adjusting entry for the year ended December 31, 2021 for the adjusting event that happened on March 11, 2022 involving a court case of Russia as the defendant which was settled and the entity was obligated to pay the plaintiff P1,500,000; but Russia previously recognized a P1,000,000 liability for the suit because management deemed it probable that the entity would lose the case.
(P1,500,000 - P1,000,000) = additional liability for P500,000
