TWENTYFIRST Corporation a manufacturer of cleaning products is preparing annual financial statements at December 31, 2020. Because of a recently proven health hazard in one of its cleaning products, the PH government has clearly indicated its intention of having TWENTYFIRST recall all can of this paint sold in the last three months. The management of TWENTYFIRTS estimates that this recall would cost P5,800,000. What accounting recognition, if any, should be accorded this situation? Group of answer choices Expense of P5,800,000 and liability of P5,800,000 Note disclosure only Expense of P5,800,000 and retained earnings restrictions of P5,800,000 No recognition

TWENTYFIRST Corporation a manufacturer of cleaning products is preparing annual financial statements at December 31, 2020. Because of a recently proven health hazard in one of its cleaning products, the PH government has clearly indicated its intention of having TWENTYFIRST recall all can of this paint sold in the last three months. The management of TWENTYFIRTS estimates that this recall would cost P5,800,000. What accounting recognition, if any, should be accorded this situation? Group of answer choices Expense of P5,800,000 and liability of P5,800,000 Note disclosure only Expense of P5,800,000 and retained earnings restrictions of P5,800,000 No recognition

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

Chapter5: The Income Statement And The Statement Of Cash Flows

Section: Chapter Questions

Problem 4MC

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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?
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On March 1, 2019, Elkhart enters into a new contract to build a specialized warehouse for 7 million. The promise to transfer the warehouse is determined to be a performance obligation. The contract states that if the warehouse is usable by November 30, 2019, Elkhart will receive a bonus of 600,000. For every week after November 30 that the warehouse is not usable, the bonus will decrease by 150,000. Elkhart provides the following completion schedule: Required: 1. Assume that Elkhart uses the expected value approach. What amount should Elkhart use for the transaction price? 2. Assume that Elkhart uses the most likely amount approach. What amount should Elkhart use for the transaction price? 3. Next Level What is the purpose of assessing whether a constraint on the variable consideration exists?
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.
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ABC Corporation a manufacturer of cleaning products is preparing annual financial statements at December 31, 2020. Because of a recently proven health hazard in one of its cleaning products, the PH government has clearly indicated its intention of having ABC recall all can of this paint sold in the last three months. The management of ABC estimates that this recall would cost P5,800,000. What accounting recognition, if any, should be accorded this situation?
Mama Mo Na Tita Ko Corporation, a manufacturer of cleaning products, is preparing annual financial statements at December 31, 2022. Because of a recently proven health hazard in one of its cleaning products, the government has clearly indicated its intention of having the company recall all cans of this paint sold in the last three months. The management estimates that this recall would cost P800,000. What accounting recognition, if any, should be accorded this situation? Statement 1: Recognize expense of P800,000 and liability of P5,800,000. Statement 2: Disclosed P800,000 as contingent liability in the notes to financial statement. Both statements are correct Both statements are incorrect Only statement 2 is correct Only statement 1 is correct
Coronado Industries, a manufacturer of household paints, is preparing annual financial statements at December 31, 2020. Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Coronado recall all cans of this paint sold in the last six months. The management of Coronado estimates that this recall would cost $ 810000. What accounting recognition, if any, should be accorded this situation? Appropriation of retained earnings of $ 810000 Operating expense of $ 810000 and liability of $ 810000 No recognition Note disclosure only
6 Mama Mo Na Tita Ko Corporation, a manufacturer of cleaning products, is preparing annual financial statements at December 31, 2022. Because of a recently proven health hazard in one of its cleaning products, the government has clearly indicated its intention of having the company recall all cans of this paint sold in the last three months. The management estimates that this recall would cost P800,000. What accounting recognition, if any, should be accorded this situation? Statement 1: Recognize expense of P800,000 and liability of P5,800,000. Statement 2: Disclosed P800,000 as contingent liability in the notes to financial statement. Group of answer choices Only statement 2 is correct Only statement 1 is correct Both statements are correct Both statements are incorrect
Ciclista Inc., a bicycle manufacturer, is preparing its financial statements for December 31, 2020. The company has identified the following legal situations that can be classified as contingencies. 1. The company has discovered that a type of bicycle that they began to manufacture and sell in 2020 has some defects in the handlebars. The company has sent a statement to newspapers and magazines offering to replace the handlebars. The company estimates a cost of $ 400,000 for these repairs (This is recorded as a separate entry from Expense). No legal charges have been filed for damages caused by the defect. The company considers that there are 2. The company maintains an incinerator in the back of a warehouse that is used to burn cardboard boxes received in inventory shipments. In September 2020, the state environmental protection agency filed a lawsuit against the company for contamination. The company hopes to stop using the incinerator and start recycling. However, his lawyers…
Sound Audio manufactures and sells audio equipment for automobiles. Engineers notified management in December 2021 of a circuit flaw in an amplifier that poses a potential fire hazard. An intense investigation indicated that a product recall is virtually certain, estimated to cost the company $10.5 million. The fiscal year ends on December 31.Required:1. Should this loss contingency be accrued, only disclosed, or neither?2. What loss, if any, should Sound Audio report in its 2021 income statement?3. What liability, if any, should Sound Audio report in its 2021 balance sheet?4. Prepare any journal entry needed.
Western Manufacturing is involved with several potential contingent liabilities. Western’s fiscal year-end is December 31, 2024, and the financial statements will be issued in early February 2025. Required: Identify the appropriate accounting treatment in each situation below. Describe the means of reporting each situation and explain your reasoning. During 2024, Western experienced labor disputes at three of its plants. Management hopes an agreement will soon be reached. However, negotiations between the company and the unions have not produced an acceptable settlement, and the employee strikes are currently under way. It is virtually certain that material costs will be incurred, but the amount of possible costs cannot be reasonably estimated. Western is involved in a suit filed in January 2025 by Crump Holdings seek $88 million as an adjustment to the purchase price in connection with the company’s sale of its textile business in 2024. The suit alleges that Western…