@hopefulcpa
I wish I could explain it better. All in all ,the deciding factor is that there would never be a disclosure if the stock price moved in a downward spiral. People can check the internet to get up to date info on the price, much more current than when the audit report goes to press.
Moving on, your other question is both. If we are making an adjustment for a subsequent event and we are able to estimate the liability reasonably, then we are talking about setting up a liability account or a “Reserve for loss” or something to that effect. The entry would be as follows:
dr. estimated loss on liability 100,000 (expense account)
cr. reserve for loss on liability 100,000 (balance sheet account)
You can look at the reserve account as a payable account. We are putting this money aside for the future liability that we feel is probable and reasonably estimable. To “fund” the reserve account, we have to debit an expense account. The entry is very much like a payable. You debit an expense account, credit the acct payable account until you write the check. When you write the check you debit the payable and then credit cash. In this case when the liability is actually paid, you would :
dr. reserve for loss on liability 100,000 (balance sheet)
cr. cash 100,000 (balance sheet)
So, you can see that the statements affected on the original entry would be both. Let me know if that makes sense. I will be so glad when I can put Audit behind me.
serenity now!
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