Xing Fu ltd., in preparation of its December 31, 2019, financial statements, is attempting to determine the proper accounting treatment for each of the following situations. 1. As a result of uninsured accidents during the year, personal injury suits for €175,000 and €50,000 have been filed against the company. It is the judgment of Xing Fu's legal counsel that an unfavorable outcome is unlikely in the €50,000 case but that an unfavorable verdict approximating €150,000 will probably result in the €175,000 case. 2. Xing Fu owns a subsidiary in a foreign country that has a book value of €6,500,000 and an estimated fair value of €10,000,000. The foreign government has communicated to Xing Fu its intention to expropriate the assets and business of all foreign investors. On the basis of settlements other firms have received from this same country, it is virtually certain that Xing Fu will receive 50% of the fair value of its properties as final settlement. 3. Xing Fu operates profitably from a factory it has leased. During 2019, Xing Fu decides to relocate these operations to a new factory. The lease of the old factory continues for the next 5 years. The lease cannot be cancelled and the factory cannot be subleased. Xing Fu determines that the cost to settle the old lease is €750,000. 4. Litigation is being pursued for the recovery of €2,000,000 consulting fees on a failed project. The directors believe it is more likely than not that their claim will be successful. Instructions:
Xing Fu ltd., in preparation of its December 31, 2019, financial statements, is attempting to determine the proper accounting treatment for each of the following situations.
1. As a result of uninsured accidents during the year, personal injury suits for €175,000 and €50,000 have been filed against the company. It is the judgment of Xing Fu's legal counsel that an unfavorable outcome is unlikely in the €50,000 case but that an unfavorable verdict approximating €150,000 will probably result in the €175,000 case.
2. Xing Fu owns a subsidiary in a foreign country that has a book value of €6,500,000 and an estimated fair value of €10,000,000. The foreign government has communicated to Xing Fu its intention to expropriate the assets and business of all foreign investors. On the basis of settlements other firms have received from this same country, it is virtually certain that Xing Fu will receive 50% of the fair value of its properties as final settlement.
3. Xing Fu operates profitably from a factory it has leased. During 2019, Xing Fu decides to relocate these operations to a new factory. The lease of the old factory continues for the next 5 years. The lease cannot be cancelled and the factory cannot be subleased. Xing Fu determines that the cost to settle the old lease is €750,000.
4. Litigation is being pursued for the recovery of €2,000,000 consulting fees on a failed project. The directors believe it is more likely than not that their claim will be successful.
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