On 04 February 2019, the judge presiding over the case ruled that Fresh should pay $ 1 000 000 to the plaintiff as well as pay all of the plaintiff's
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Fresh Limited, a manufacturer of toothpaste, was taken to court over alleged defamation charges when the company accused a rival toothpaste manufacturer of fraud. Before year end (31 December 2018), the lawyer of Fresh Limited advised that, although losing the case was unlikely, legal fees and settlement costs could amount to $ 900 000 in the event that the court case was lost.
On 04 February 2019, the judge presiding over the case ruled that Fresh should pay $ 1 000 000 to the plaintiff as well as pay all of the plaintiff's legal fees, which amounted to $ 180 000. The financial statements had not yet been authorized for issue at the time of the court ruling.
Required:
Discuss how this information should be treated in the financial statements of Fresh Limited for the year ended 31 December 2018
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- Pending Damage Suit Disclosure On December 15, 2019, a truck driver for Cork Transfer Company negligently rounded a curve that was also a bridge covering several local merchant shops. The truck jumped the guardrail and fell 30 feet onto one of the shops, causing highly flammable chemicals in the truck to explode. Although by February 22, 2020 (the date on which Corks financial statements for 2019 are issued), no claims had been filed against Cork, the companys legal counsel believes it is probable that some will be filed in the future. However, counsel does not believe it can reasonably estimate the amount of these potential claims. Required: Explain the accounting treatment, if any, Cork should give the contingent loss occurring from the wreck in the December 31, 2019, financial statements.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.Constant Company is being sued for P4, 000,000 for an injury caused to a child as a result of alleged negligence while the child was visiting the Constant Company plant in March 2018. The suit was filed in July 2018. Constant’s lawyer states that it is probable that Constant will lose the suit and be found liable for a judgement costing anywhere from P400, 000 to P2, 000,000. However the lawyer states that the most probable judgement is P1, 000,000. Instructions:How should Constant report the suit in its 2018 financial statements. Discuss the rationale for your answer. Include in your disclosures, if any, that should be made in Constant’s financial statements
- 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?During 2018, Rosanna Company was sued by a competitor for P5,000,000 for infringement of a patent. Based on the advice of the legal counsel, the entity accrued the sum of P3,000.000 as a provision on December 31, 2018. Subsequently, on March 15, 2019, the Supreme Court decided in favor of the party alleging infringement of the patent and ordered the defendant to pay the aggrieved party a sum of P3,500,000. The financial statements were prepared by management on February 15, 2019 and approved by the board of directors on March 31, 2019. The financial statements were prepared by management on February 15, 2019 and approved by the board of directors on March 31, 2019. What amount should be adjusted on December 31, 2018 in relation to this event?
- A truck owned and operated by Rasin Company was involved in an accident with an auto driven by Lakasei on December 10, 2020. Rasin Company received notice on December 25, 2020 of a lawsuit for P350,000 damages for a personal injury suffered by Lakasei. The legal counsel of the company believes that it is probable that Rasin will pay the damages ranging between P500,000 to P1,000,000. Each point within that range of amounts is considered as likely as any other point. The financial statements were authorized to be issued on March 1, 2021. How much provision should Rasin recognize on December 31, 2020?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?
- Tender Foot, Inc., is involved in litigation regarding a faulty product sold in a prior year. The company has consulted with its attorney and determined that it is possible that it may lose the case. The attorney estimated that there is a 50% chance of losing. The attorney estimated that the amount of any payment would be between P500,000 and P800,000 with P500,000 as the best estimate. How much should be recognized as a liability?On December 31, 2019, Home Company was a defendant in a pending lawsuit. The suit arose from the alleged defect of a product that Home sold in 2015. In the opinion of Home’s attorney, it is probable that Home will have to pay P500,000 and it is reasonably possible that Home will have to pay additional P100,000 as a result of this lawsuit. What amount needs to be disclosed only?Sunrise Company provided the following information on December 31, 2019: A personal injury liability suit for P500,000 was brought against Sunrise Company in March 2019. The management and legal counsel of Sunrise Company concluded that it is not probable that Sunrise Company will be responsible for damages and that P150,000 is the best estimate of the damages. In July 2019, Sunrise Company became involved in a tax dispute with the BIR pertaining to 2018 income tax. In December 2019, a judgment for P400,000 was assessed against Sunrise Company by the tax court. Sunrise Company is appealing the amount of judgment. The tax advisor and legal counsel of Sunrise Company believed it is probable that the assessment can be reduced on appeal by 50%. Sunrise Company signed as guarantor for P200,000 loan by PNB to Sunset Company, a principal supplier of Sunrise. By reason of financial difficulties, it is probable that Sunrise Company shall pay P200,000 loan with only a 60% recovery anticipated…
