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Surfing the Standards Case 2: Amounts Paid by Shareholders for an Entity’s Expenses
Moocher Company, a publicly traded company that has a December 31 year-end manufactures and sells novelty toys. Recently, one of the toys that Moocher produced and sold was found to cause serious digestive problems for dogs that ate the toy. Accordingly, Moocher was sued by a group of consumers in May of the current year. Moocher didn't believe that it would lose the suit in a court ruling, but it did not want the bad publicity. Because Moocher did not have extensive cash reserves, the primary shareholder (55% owner) of Moocher transferred 40,000 shares to the plaintiffs to settle the case in December of the current year. The market value of the shares was $25 per share at the time of the transfer.
Does Moocher Company need to report anything in its annual financial statements for the current year related to this transaction?
Use the U.S. authoritative literature to support your conclusions.
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INTERMEDIATE ACCOUNTING
- ABC Inc. has is being sued by a customer. The plaintiff (customer) claims $50,000 for product deficiencies. The controller discussed the claim with legal counsel and the lawyer notes that the company is likely to lose the suit with an estimated payout of $50,000. The controller has identified this as a contingent loss (liability) and has accrued it in the financial statements and prepared the note disclosure. The financial statement note disclosure states the following: "During the year, ABC Inc. received a claim for an alleged product deficiency. ABC Inc. is defending the action however legal advice at this time indicated that is likely the claim could result in a loss for ABC İnc." ABC Inc. reports under ASPE. Required: a) Provide the path to the appropriate reference in the Handbook assuming the entity follows ASPE. b) Indicate what is missing from the note disclosure, if anything, for ABC Inc.arrow_forwardMurals-R-Us Corporation is being sued for $12 million for age discrimination. The company lawyers believe it is probable the company will have to pay the $12 million on the lawsuit. How would the Murals-R-Us accountants account for this lawsuit?arrow_forwardBelow are two independent situations. Discuss the proper accounting treatment, including any required disclosures, for each situation. Give the rationale for your answers. In August, 2022, a worker was injured in the factory in an accident, partially the result of his own negligence. The worker has sued Mikell Co. for $800,000. Counsel believes it is reasonably possible that the outcome of the suit will be unfavorable and the settlement would cost the company from $250,000 to $500,000 A suit for breach of contract seeking damages of $2,000,000 was filed by an author against Kenley Company on October 4, 2022. Kenley’s legal counsel believes that an unfavorable outcome is probable. A reasonable estimate of the award to the plaintiff is between $500,000 and $1,500,000. No amount within this range is a better estimate of potential damages than any other amount.arrow_forward
- Top Sound International designs and sells high-end stereo equipment for auto and home use. Engineers notified management in December 2024 of a circuit flaw in an amplifier that poses a potential fire hazard. Further investigation indicates that a product recall is probable, estimated to cost the company $2.6 million. The fiscal year ends on December 31. Required:1. Should this contingent liability be reported, disclosed in a note only, or neither?2. What loss, if any, should Top Sound report in its 2024 income statement?3. What liability, if any, should Top Sound report in its 2024 balance sheet?4. What entry, if any, should be recorded? 1. Should this contingent liability be reported, disclosed in a note only, or neither? This contingent liability should be ?????? 2. What loss, if any, should Top Sound report in its 2024 income statement? (Enter your answer in dollars, not in millions (i.e. 5.5 million should be entered as 5,500,000).) loss to be reported ???????? 3. What…arrow_forwardSweet Company recently was sued by a competitor for patent infringement. Attorneys have determined that it is probable that Sweet will lose the case and that a reasonable estimate of damages to be paid by Sweet is $315,000. In light of this case, Sweet is considering establishing a $103,400 self-insurance allowance. What entry, if any, should Sweet record to recognize this loss contingency?arrow_forwardTop Sound International designs and sells high-end stereo equipment for auto and home use. Engineers notified management in December 2024 of a circuit flaw in an amplifier that poses a potential fire hazard. Further investigation indicates that a product recall is probable, estimated to cost the company $2.2 million. The fiscal year ends on December 31. Required: 1. Should this contingent liability be reported, disclosed in a note only, or neither? 2. What loss, if any, should Top Sound report in its 2024 income statement? 3. What liability, if any, should Top Sound report in its 2024 balance sheet? 4. What entry, if any, should be recorded? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Should this contingent liability be reported, disclosed in a note only, or neither? This contingent liability should bearrow_forward
- Kelly 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 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 P 500,000. What is the required journal entry as a result of this litigation? *a. Debit Litigation Expense for P 500,000 and credit Litigation liability for P 500,000b. No journal entry is requiredc. Debit Litigation Expense for P 200,000 and credit Litigation Liability for P 200,000d. Debit Litigation Expense for P 300,000 and credit Litigation Liability for P 300,000arrow_forwardTop Sound International designs and sells high-end stereo equipment for auto and home use. Engineers notified management in December 2024 of a circuit flaw in an amplifier that poses a potential fire hazard. Further investigation indicates that a product recall is probable, estimated to cost the company $3.2 million. The fiscal year ends on December 31. Required: 1. Should this contingent liability be reported, disclosed in a note only, or neither?2. What loss, if any, should Top Sound report in its 2024 income statement?3. What liability, if any, should Top Sound report in its 2024 balance sheet?4. What entry, if any, should be recorded?arrow_forward15. GINGERBREAD Company is involved in a litigation regarding a faulty product sold in a prior year. The entity has consulted with lawyer and determined that there is a 50% chance of losing. The lawyer estimated that the amount of any payment would be between ₱500,000 to ₱800,000 with ₱500,000 as the best estimate. What is the required journal entry as a result of this litigation? Debit Litigation expense and credit Litigation liability for ₱ 650,000 No journal entry is required Debit Litigation expense and credit Litigation liability for ₱ 250,000 Debit Litigation expense and credit Litigation liability for ₱ 500,000arrow_forward
- For each of the independent situations below indicate the appropriate accounting treatment and note disclosure. Question 4 options: A judge has found the company to be liable for an amount of $400,000 for copyright infringement. The company's lawyers feel that an appeal is unlikely to succeed. The company is being sued as a result of selling a product that made its customers sick. Legal counsel believes the lawsuit will be successful but is unable to estimate the amount of damages the company will have to pay. The company is being sued for patent infringement. Legal counsel believes that the claim is frivolous and that the likelihood of a successful lawsuit is remote. A customer fell on ice outside the company's store. Legal counsel feels that it is only thirty percent likely that a lawsuit will be successful. 1. Record a liability and disclose the situation in the notes. 2. Do not…arrow_forwardABC Company sells cars. In 2018, the entity sold 1,000 units before discovering a significant defect in their construction. By December 31, 2018 a lawsuit had been filed against the entity. The entity’s legal counsel believes that it is likely that the entity will win. The entity is being sued for P1,000,000.What is the amount of liability to be accrued?arrow_forwardTender 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?arrow_forward
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage LearningBusiness Its Legal Ethical & Global EnvironmentAccountingISBN:9781305224414Author:JENNINGSPublisher:Cengage