Question:
For each of the subsequent items, suppose that Josh Feldstein, CPA, is expressing an opinion on Scornick Company's financial statements for the year ended December 31, 2011; that he completed fieldwork on January 21, 2012; and that he now is preparing his opinion to accompany the financial statements. In every item a subsequent event is described. This event was disclosed to the CPA either in connection with his review of subsequent events or after the date on which the auditor has obtained sufficient appropriate audit evidence. Explain the financial statement effects, if any, of each of the subsequent events. Each of the five items is independent of the other four and is to be considered separately.
1. A large account receivable from Agronowitz Company (material to financial statement presentation) was considered fully collectible at December 31, 2011. Agronowitz suffered a plant explosion on January 25, 2012. Because Agronowitz was uninsured, it is unlikely that the account will be paid.
2. The tax court ruled in favor of the company on January 25, 2012. Litigation involved deductions claimed on the 2008 and 2009 tax returns. In accrued taxes payable Scornick had provided for the full amount of the potential disallowances. The Internal Revenue Service will not appeal the tax court's ruling.
3. Scornick's Manufacturing Division, whose assets constituted 45 percent of Scornick's total assets at December 31, 2011, was sold on February 1, 2012. The new owner assumed the bonded indebtedness associated with this property.
4. On January 15, 2012, R. E. Fogler, a major investment adviser, issued a negative report on Scornick's long-term prospects. The market price of Scornick's common stock subsequently declined by 40 percent.
5. At its January 5, 2012, meeting, Scornick's board of directors voted to increase substantially the advertising budget for the coming year and authorized a change in advertising agencies