Vertix, a pharmaceutical company, has a December 31 fiscal year end (FYE) and usually files its annual reports with the SEC around March 3, approximately two months after its FYE. Vertix’s Total Assets as of December 31, 2020, before the following six events are taken into consideration, is $1 billion.

Determine how Vertix should treat these events in regards to the 2020 financial statements from the following options:

1. Adjust the 2020 financial statements only.
2. Disclose the information in the footnotes to the 2020 financial statements only.
3. Adjust the 2020 financial statements and discuss in the footnotes.
4. Neither adjust nor disclose anything about the item in the 2020 financials.

REQUIRED: Choose the appropriate accounting treatment for each of the independent contingent events/subsequent events by choosing from the above four options (A, B,C, or D) and filling in the blanks. Only one answer per event.

1. On January 31, 2021, Vertix issued an additional 2,000,000 shares of common stock and raised $5,000,000 in capital.

2. On February 26 of 2021, after Vertix prepared their 2020 annual reports to be filed with the SEC in March, an internal audit discovers a material mistake in counting the number of ending inventory items – ending inventory for 2020 as a result is over-valued by $3,000,000.

3. During 2020 Vertix sued a competitor for patent infringement. Vertix’s lawyers believes it is probable that the company will be successful with court proceeds in the range of $20,000 to $40,000, with the most likely outcome in that range to be $30,000.

4. In October 2020 Vertix was notified by federal investigators of criminal tampering of their drugs in Chicago area drug stores. In February of 2021 Vertix announced the withdrawal of the drugs from all Chicago area stores, after the company learned in January of 2021 that the financial impact of this tampering amounts to $3,000,000. Assume income before taking into consideration this criminal tampering is $10,000,000.

5. In 2020 Vertix recorded a reserve for a pending lawsuit for $2,000,000. In January 2021 the case is settled out of court for $1,850,000. How should Vertix treat this settlement in their 2020 annual reports to be filed with the SEC?

6. During 2020 Vertix was sued by a supplier for $5,000,000. In January 2021 Vertix’s lawyers estimated that should the company lose the court battle, the damage would amount to $4,000,000. The lawyers assess the probability of losing the case to be reasonably possible but not probable.

Answer rating: 100% (QA)

1 Option D Neither adjust nor disclose anything about the item in the 2020 financials 2 Option A A... View the full answer