Shakespeare Case

Line of Credit Modification of Shakespeare Corporation should not be recognized in in the issuance of 2011 financial statements. According to the question, the company completed its modification of the terms of the line of credit on March 1, 2012. The company has a calendar year end of December 31 and planning to issue its financial statements on March 20, 2012.  Therefore, Shakespeare extended LOC terms after the balance sheet date.

According to 855-10-25-1 Evidence about conditions that existed at the date of the balance sheet should be recognized in the financial statements. This is saying that any events that existed before year-end at December 31st but has not been settled after the date should be recognized. 855-10-55-1 provided a list of examples of subsequent events that require recognition.

The second type of subsequent event is evidence about conditions that did not exist at the date of the balance sheet. We determined that Line of Credit Modification of Shakespeare Corporation is a nonrecognized subsequent event according to 855-10-25-3. When an event occurred after the balance sheet date but before the date of issuance of financial statement shall not be recognized but disclosed under the notes.

Shakespeare Corporation must disclose its modification on the line of credit in the financial statement.  According to 855-10-50-2, the way to disclose non-recognized subsequent events may vary depending on its financial effect. The entity shall disclose the nature of the event and an estimate of its financial effect or a statement that such an estimate cannot be made. After the entity made an estimate of financial effect, depending on the level of significant to determine whether a pro forma financial data is necessary 855-1050-3. If the modification on line of credit is material and significant enough that it will cause a big financial effect, then the company should create a pro forma financial data that shows the financial information if the event had occurred on or before the balance sheet date.