Mackay
Corporation completed, authorized, and issued its financial statements
following IFRS for the year ended December 31, 2011, on March 10, 2012. The
following events took place early in 2012.
1.
On January 10, 19,000 common shares were issued at $45 per share.
2.
On March 1, Mackay determined after negotiations with the Canada Revenue Agency
that income taxes payable for 2011 should be $1.2 million. At December 31,
2011, income taxes payable were recorded at $1 million.
Instructions
Discuss
how these post-balance sheet events should be reflected in the 2011 financial
statements.
(1) The issuance of common shares is an example of
a subsequent event which provides evidence about conditions that did not
exist at the balance sheet date but arose subsequent to that date. Therefore,
no adjustment to the financial statements is recorded. However, this event
should be disclosed in the notes, a supplemental schedule, or even through
pro-forma financial data.
(2) The changed estimate of taxes payable is an
example of a subsequent event that provides additional evidence about
conditions that existed at the balance sheet date. The income tax liability
existed at December 31, 2011, but the amount was not certain. This event
affects the estimate previously made and should result in an adjustment of the
financial statements. The correct amount ($1,200,000) would have been recorded
at December 31 if it had been available. Therefore, Mackay should increase
income tax expense in the 2011 income statement by $200,000. In the balance
sheet, income taxes payable should be increased and retained earnings decreased
by $200,000.
