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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Communication

WBM Motorworks is a manufacturer of high-end touring and off-road motorcycles. On November 30, the company was sued by a customer who was injured when the front shock absorber on the WBM Series 3 motorcycle cracked during use. The company conducted a preliminary investigation into the matter during December and found evidence of a manufacturing defect in the shock absorber. While it is uncertain whether the manufacturing defect is the source of the product failure, the company has voluntarily recalled the front shock absorbers on the Series 3 motorcycles. The company is uncertain how the lawsuit will be resolved. Similar lawsuits against other manufacturers have been settled for approximately $2,000,000.

Write a brief memo to the president of WBM Motorworks, U. D. Mach III, discussing how the lawsuit might be reported in the financial statements.

To determine

Ethics Case

W Motorworks is a manufacturer of motorcycles. A customer had sued the company on the grounds that its motorcycles have a manufacturing defect due to which the customer got injured. The company is doubtful whether the manufacturing defect is the reason for the cracked shock absorber and thus, the product failure. It is uncertain as how to the resolve the lawsuit. However, similar lawsuits have been resolved by paying certain settling amount to the customers.

To write: a memo to the president of WBM Motorworks, discussing about the reporting of the lawsuit in the financial statements.

Explanation

Write a memo to the president of WBM Motorworks, discussing about the reporting of the lawsuit in the financial statements.

MEMO

From: ABC

To: Mr. XYZ

      The president

      W Motorworks

Dated: 27th February, 20XX

Re: discussing about the reporting of the lawsuit in the financial statements

Sir,

It can be said that the lawsuit against the company due the cracked shock absorber forms a possible liability to be paid by the company to be paid to the customer. The reporting of such liabilities depend upon two factors: the probability of losing the lawsuit and the measurement of the loss amount.

If the probability of losing the lawsuit is higher and the amount of loss can be determined, then both the loss amount and the liability should be recorded in the books of accounts. However, only if it is likely to incur only the loss from the lawsuit, it should be disclosed in the notes to the financial statements not in the books of accounts.

As per the current scenario, it is most likely that the company would have both the loss and liability if the motorcycle taken for a trial. Thus, should be recorded on the income statement for loss and the balance sheet for liability...

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