Dow Chemical was sued for infringing Bayer Industries' patent No. 123X45 in March of 2019. Dow's lawyers believed it was probable it was going to lose and estimated damages were $4,000,000 to $7,000,000. They also believed the high end of the range was more-likely-than-not. Dow's year-end is December 31. On June 1, 2020, after Dow's 2019 financial statements were issued, the plaintiff accepted a cash settlement of $5,000,000. Dow Chemical paid the liability on the same day. 1. Show, in good form, the journal entry made to record the settlement.

Dow Chemical was sued for infringing Bayer Industries' patent No. 123X45 in March of 2019. Dow's lawyers believed it was probable it was going to lose and estimated damages were $4,000,000 to $7,000,000. They also believed the high end of the range was more-likely-than-not. Dow's year-end is December 31. On June 1, 2020, after Dow's 2019 financial statements were issued, the plaintiff accepted a cash settlement of $5,000,000. Dow Chemical paid the liability on the same day. 1. Show, in good form, the journal entry made to record the settlement.

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter9: Current Liabilities And Contingent Obligations

Section: Chapter Questions

Problem 22E

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Contingencies Fallon Company, a toy manufacturer that also operates several retail outlets, is preparing its December 31, 2019, financial statements. It has identified the following legal situations that may qualify as contingencies: A customer is suing the company for 800,000 in damages because her child was injured in November 2019 while riding an escalator that stopped suddenly in one of its stores. The child was hurt when he tripped and fell while walking down an escalator that was going up. Legal counsel feels that the child is partially at fault, but that it is probable that the lawsuit will be settled for between SO,000 and 100,000, with 80,000 being the most likely amount. Fallon has discovered that a skateboard it began manufacturing and selling in 2019 has defective bearings, sometimes causing a wheel to fall off. Fallon has issued a recall notice in newspapers and magazines in which it offers to replace the bearings. It estimates a cost of 200,000 for these repairs. No lawsuits have been filed for injury claims, although the company feels that there is a reasonable possibility that claims may total as high as 2 million. Fallon has an incinerator behind one of its retail outlets which is used to burn cardboard boxes received in shipments of inventory from suppliers. The state environmental protection agency filed suit against the company in August 2019 for air pollution. Fallon expects to stop using the incinerator and begin recycling. However, its lawyers believe that it is probable that a fine of between 40,000 and 60,000 will be levied against the company, although they cannot predict the exact amount. In early 2019, Fallon signed a contract with a computer vendor to install state of the art cash registers in all of its retail outlets. Because of the vendors inability to acquire sufficient cash registers, the vendor canceled the contract. Fallon has filed a breach of contract suit against the vendor, claiming 300,000 in damages. The companys lawyers expect that it will settle the suit out of court for 150,000. Required: Next Level For each situation, prepare the journal entry (if any) on December 31, 2019, to record the information for Fallon, and explain your reasoning. If no journal entry is recorded, explain how the information would be disclosed in Fallons 2019 annual report. How would your answers change if Fallon used IFRS?
It is February 16, 2020, and you are auditing Davenport Corporation's financial statements for 2019 (which will be issued in March 2020). You read in the newspaper that Travis Corporation, a major customer of Davenport, is in financial difficulty. Included in Davenports accounts receivable is 50,000 (a material amount) owed to it by Travis. You approach Jim Davenport, president, with this information and suggest that a reduction of accounts receivable and recognition of a loss for 2019 might be appropriate. Jim replies, Why should we make an adjustment? Ted Travis, the president of Travis Corporation, is a friend of mine; he will find a way to pay us, one way or another. Furthermore, this occurred in 2020, so lets wait and see what happens; we can always make an adjustment later this year. Our 2019 income and year-end working capital are not that high; our creditors and shareholders wouldnt stand for lower amounts than they already are. Required: From financial reporting and ethical perspectives, prepare a response to Jim Davenport regarding this issue.
Beautiful Company is involved in litigation regarding a faulty product sold in a prior year during 2021. The company has consulted with its attorney and determined that it is possible that they may lose the case. The attorneys estimated that there is a 40% chance of losing. If this is the case, their attorney estimated that the amount of any payment would be P500,000.How much is the Provision to be reported at December 31, 2021?
On Dec. 31, 2020, an employee filed a P3,000,000 lawsuit against Siomai Company for damages suffered when one of Siomai’s plants exploded on July 20, 2020. Siomai’s legal counsel expects the company will lose the lawsuit and estimates the loss to be between P500,000 and P1,500,000. The employee has offered to settle the lawsuit out of court for P900,000 but Siomai will not agree to the settlement. In its Dec. 31, 2020 statement of financial position, what amount should Siomai Company report as a provision from the lawsuit?
In May 2021, Cruiser Company filed suit against Stallman, Inc. seeking P850,000 damages for patent infringement. A court verdict in November 2021 awarded Cruiser P600,000 in damages, but Stallman's appeal is not expected to be decided before 2021. Cruiser's counsel believes it is probable but not virtually certain that Cruiser will be successful against Stallman for an estimated amount in the range between P300,000 and P450,000, with P400,000 considered the most likely amount. What amount should Cruiser record as a contingent asset from lawsuit in the year ended December 31, 2021? None 300,000 400,000 600,000
In May 2020, West Company filed suit against brown Inc. seeking P850, 000 damages for patent infringement. A court verdict in November 2020 awarded West P600, 000 in damages, but Brown’s appeal is not expected to be decided before 2020. West’s counsel believes it is probable but not virtually certain that West will be successful against brown for an estimated amount in the range between P300, 000 and P450, 000, with P400, 000 considered the most likely amount. What amount should West record as a contingent asset from lawsuit in the year ended December 31, 2020?
Toy Company provided the following facts regarding pending litigation on December 31, 2020: • The entity is defending against a first lawsuit and believes there is a 51% chance it will lose in court. The entity estimates that damages will be P1,000,000. • The entity is defending against a second lawsuit for which management believes it is virtually certain to lose in court. •If it loses the lawsuit, management estimates damages will fall somewhere in the range of P3,000,000 to P5,000,000 with each amount in that range equally likely to occur. • The entity is defending against a third lawsuit but the relevant loss will only occur far into the future. The present values of the endpoints of the range are P1,500,000 and P2,500,000. The management believes the effects of time value of money on these amounts are material but also believes the timing of these amounts is uncertain. The entity is defending against a fourth lawsuit and believes there is only a 25% chance it will lose in court.…
Toy Company provided the following facts regarding pending litigation on December 31, 2020: • The entity is defending against a first lawsuit and believes there is a 51% chance it will lose in court. The entity estimates that damages will be P1,000,000. • The entity is defending against a second lawsuit for which management believes it is virtually certain to lose in court. •If it loses the lawsuit, management estimates damages will fall somewhere in the range of P3,000,000 to P5,000,000 with each amount in that range equally likely to occur. • The entity is defending against a third lawsuit but the relevant loss will only occur far into the future. The present values of the endpoints of the range are P1,500,000 and P2,500,000. The management believes the effects of time value of money on these amounts are material but also believes the timing of these amounts is uncertain. The entity is defending against a fourth lawsuit and believes there is only a 25% chance it will lose in court.…
Iron Man Company provided the following facts regarding pending litigation on December 31, 2020:* The entity is defending against a first lawsuit and believes there is a 51% chance it will lose in court. The entity estimates that damages will be P1,000,000.* The entity is defending against a second lawsuit for which management believes it is virtually certain to lose in court. If it loses the lawsuit, management estimates damages will fall somewhere in the range of P3,000,000 to P5,000,000 with each amount in that range equally likely to occur.* The entity is defending against a third lawsuit but the relevant probable loss will only occur far into the future. The present values of the endpoints of the range are P1,500,000 and P2,500,000. The management believes the effects of time value of money on these amounts are material but also believes the timing of these amounts is uncertain.* The entity is defending against a fourth lawsuit and believes there is only a 25% chance it will lose…
In May 2020, ABC Company filed suit against XYZ Company seeking P1,900,000 damages for patent infringement. A court verdict in November 2020 awarded ABC P1,500,000 in damages but XYZ's appeal is not expected to be decided before 2021. ABC's counsel believes it is probable that ABC will be successful against XYZ for an estimated amount in the range between P800,000 and P1,000,000, with P1,000,000 considered as the most likely amount. What amount should ABC record as income from the lawsuit for the year ended December 31, 2020? a. 1,500,000 b. 1,100,000 c. 1,000,000 d. 0
On January 5, 2022, a company received a P5,000,000-complaint from one of its employees who suffered an accident last December 31, 2021, while in the production department. The company's legal counsel believed it would probably lose the case and the best estimate of the loss was P2,000,000. The complainant offered an out of court settlement of P3,000,000 but the company did not accept. On February 1, 2022, the court ordered the company to pay P2,500,000. The company paid the employee on February 10, 2022. The company's P10,000,000 comprehensive insurance policy has P1,000,000 deductible clauses. The company's financial statements were issued on March 15, 2022. What amount of liability from lawsuit should the company recognize in its December 31, 2021 statement of financial position? A company sells gift certificates for P750 each. On December 31, 2019, the company had 1,000 gift certificates outstanding. In 2020, the company sold 4,000 gift certificates while a total 3,600 were…
On January 5, 2022, a company received a P5,000,000-complaint from one of its employees who suffered an accident last December 31, 2021, while in the production department. The company's legal counsel believed it would probably lose the case and the best estimate of the loss was P2,000,000. The complainant offered an out of court settlement of P3,000,000 but the company did not accept. On February 1, 2022, the court ordered the company to pay P2,500,000. The company paid the employee on February 10, 2022. The company's P10,000,000 comprehensive insurance policy has P1,000,000 deductible clauses. The company's financial statements were issued on March 15, 2022. What amount of liability from lawsuit should the company recognize in its December 31, 2021 statement of financial position?