Let's analyze each event using the **three steps**: 1. **Determine if a journal entry is required.** 2. **Prepare the journal entry if required, or indicate disclosure.** 3. **Explain the reasoning for each.** --- ### 1. **Lawsuit Settlement** #### Step 1: Is a journal entry required? - **Yes.** The lawsuit was probable, and a liability was already accrued for $300,000. The actual settlement was $500,000. #### Step 2: Journal entry ``` Lawsuit Loss (Expense)........$200,000 Lawsuit Liability.......................$200,000 ``` (To adjust for the additional $200,000 loss not previously accrued.) #### Step 3: Explanation - The event provides additional information about a condition that existed at year-end (the lawsuit). The final settlement was higher than the amount accrued, so the financial statements must be adjusted to reflect the actual amount. --- ### 2. **Inventory Obsolescence** #### Step 1: Is a journal entry required? - **Yes.** The inventory was already obsolete at year-end, but the amount became evident after year-end. #### Step 2: Journal entry ``` Loss on Inventory Write-down...........$120,000 Inventory........................................$120,000 ``` ($200,000 - $80,000 = $120,000 write-down) #### Step 3: Explanation - This is an adjusting event because it provides evidence of conditions that existed at the balance sheet date. The inventory was already obsolete, but the extent was determined after year-end. --- ### 3. **New Bank Loan** #### Step 1: Is a journal entry required? - **No.** The loan was obtained after year-end. #### Step 2: Disclosure only - **Disclosure**: The new loan should be disclosed in the notes as a significant non-adjusting event. #### Step 3: Explanation - The loan did not exist at the balance sheet date. However, it is significant and should be disclosed as a subsequent event. --- ### 4. **Warranty Liability Increase** #### Step 1: Is a journal entry required? - **Yes.** The defects relate to sales before year-end. #### Step 2: Journal entry ``` Warranty Expense..............$50,000 Warranty Liability................$50,000 ``` #### Step 3: Explanation - The obligation existed at year-end, and the additional information after year-end requires an adjustment for the increased liability. --- ### 5. **Dividend Approval** #### Step 1: Is a journal entry required? - **No.** The dividend was declared after year-end. #### Step 2: Disclosure only - **Disclosure**: The dividend should be disclosed in the notes to the financial statements. #### Step 3: Explanation - No liability existed at year-end. Only dividends declared before year-end are liabilities. This is a non-adjusting event but should be disclosed as it is significant. --- ## **Overall Final Answers Table** | Event | Journal Entry Required? | Journal Entry (if any) | Explanation/Disclosure | |-------|------------------------|------------------------|-----------------------| | 1 | Yes | Dr. Lawsuit Loss $200,000 <br> Cr. Lawsuit Liability $200,000 | Adjust to actual settlement; condition existed at year-end | | 2 | Yes | Dr. Loss on Inventory Write-down $120,000 <br> Cr. Inventory $120,000 | Adjust to NRV; condition existed at year-end | | 3 | No | None | Disclose as subsequent event; occurred after year-end | | 4 | Yes | Dr. Warranty Expense $50,000 <br> Cr. Warranty Liability $50,000 | Adjust to reflect increased obligation; relates to prior year sales | | 5 | No | None | Disclose as subsequent event; dividend declared after year-end | --- **Summary:** - **Events 1, 2, and 4:** Require journal entries (adjusting events). - **Events 3 and 5:** Do not require journal entries but should be disclosed (non-adjusting events).