Question

Morlan Corporation is preparing its December 31, 2017, financial statements. Two events that occurred between December 31, 2017, and March 10, 2018, when the statements were issued, are described below.

1. A liability, estimated at \(160,000 at December 31, 2017, was settled on February 26, 2018, at \)170,000.
2. A flood loss of $80,000 occurred on March 1, 2018.

What effect do these subsequent events have on 2017 net income?

Short answer

As a result of the liability adjustment, net income will decline by $10,000.

Step-by-step solution

Meaning of Financial Statements

Financial statements are statements that are prepared to determine the position of accrued profit or loss, resources, and obligations on a specific day.

Explaining the effect of subsequent events that have on 2017 net income

The change in liability would result in a $10,000 ($160,000 - $170,000) decrease in net income. Settlement of liability is the type of consequential event that gives additional evidence about the terms as on the balance sheet date. A flood loss ($80,000) is an opportunity that demonstrates conditions that did not exist at the balance sheet date but is due as of that date and does not require financial statement modifications.