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 misstated the assets and liabilities used to calculate the purchase price for the textile division. Legal counsel advises that it is reasonably possible that Western could lose up to $88 million in this suit.

Contingent liabilities refer to potential obligations that may arise in the future based on the…

Answered: Western Manufacturing is involved with…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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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 misstated the assets and liabilities used to calculate the purchase price for the textile division. Legal counsel advises that it is reasonably possible that Western could lose up to $88 million in this suit.

Definition Definition Costs that a business is responsible for paying, should a particular event potentially occur in the future. Also called a potential liability, a contingent liability is generally recorded only when the amount of liability can be reasonably estimated and the contingency is likely to occur shortly. The Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Principles (IFRS) make it mandatory for the companies to record any contingent liability taking the principles of full disclosure, materiality, and prudence into consideration.

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