You are auditing XYZ company for the year ended 12/31/2012 and will be expressing an opinion on their financial statements as of that date. You completed your field work on 1/21/13 and are now preparing your audit report and opinion. For each of the following, independent scenarios, describe how they should affect the financial statements for 12/31/2012.
a) A large accounts receivable from ABC to XYZ (material to the financial statements) was considered fully collectible at 12/31/12. However, ABC suffered a plant explosion on 1/25/13. Because ABC was uninsured, it is not likely that the account will not be paid.
b) The tax court ruled in favor of XYZ on 1/26/13. The case involved deductions XYZ claimed on their 2006 and 2007 tax returns. In accruing taxes payable, XYZ provided for the full amount of the potential disallowances. The IRS has indicated it will not appear the court's decision.
c) XYZ's manufacturing division, whose assets constituted 45% of XYZ's total assets, was sold on 2/1/13. The new owner assumed the bonded indebtedness associated with the division.
d) On 1/15/13, a major investment advisor issued a negative report on XYZ's future prospects. The market price of XYZ's common stock subsequently fell by 40%.