(a)
Concept introduction:
Contingent Liabilities
Those liabilities which depends on the occurrence of any event in the future due to happening of any event in past is known as contingent liabilities. These liabilities may occur or may not be. An example of
The effect of the contingent liabilities of
(b)
Contingent Liabilities
Those liabilities which depends on the occurrence of any event in the future due to happening of any event in past is known as contingent liabilities. These liabilities may occur. An example of contingent liability is the pending lawsuit against company, which, if goes against, can damage the company very much.
The reason for recording contingent liabilities.
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- The following selected circumstances relate to pending lawsuits for Erismus, Inc. Erismus’s fiscal year ends onDecember 31. Financial statements are issued in March 2019. Erismus prepares its financial statements accordingto U.S. GAAP.Required:Indicate the amount of asset or liability that Erismus would record, and explain your answer.1. Erismus is defending against a lawsuit. Erismus’s management believes the company has a slightly worse than50/50 chance of eventually prevailing in court, and that if it loses, the judgment will be $1,000,000.2. Erismus is defending against a lawsuit. Erismus’s management believes it is probable that the company willlose in court. If it loses, management believes that damages could fall anywhere in the range of $2,000,000 to$4,000,000, with any damage in that range equally likely.3. Erismus is defending against a lawsuit. Erismus’s management believes it is probable that the company willlose in court. If it loses, management believes that damages will…arrow_forwardThe following selected circumstances relate to pending lawsuits for Erismus, Incorporated Erismus’s fiscal year ends on December 31. Financial statements are issued in March 2025. Erismus prepares its financial statements according to U.S. GAAP. Required: Indicate the amount Erismus would record as an asset, a liability or if no accrual would be necessary in the following circumstances. Erismus is defending against a lawsuit. Erismus's management believes the company has a slightly worse than 50/50 chance of eventually prevailing in court, and that if it loses, the judgment will be $1,430,000. Erismus is defending against a lawsuit. Erismus's management believes it is probable that the company will lose in court. If it loses, management believes that damages could fall anywhere in the range of $2,830,000 to $5,660,000, with any damage in that range equally likely. Erismus is defending against a lawsuit. Erismus's management believes it is probable that the company will lose in court.…arrow_forwardContingent liabilitiesSeveral months ago, Ayers Industries Inc. experienced a hazardous materials spill at one of its plants. As a result, the Environmental Protection Agency (EPA) fined the company $240,000. The company is contesting the fine. In addition, an employee is seeking $220,000 in damages related to the spill. Lastly, a homeowner has sued the company for $310,000. The homeowner lives 35 miles from the plant but believes that the incident has reduced the home's resale value by $310,000.Ayers' legal counsel believes that it is probable that the EPA fine will stand. In addition, counsel indicates that an out-of-court settlement of $125,000 has recently been reached with the employee. The final paperswill be signed next week. Counsel believes that the homeowner's case is much weaker and will be decided in favor of Ayers. Other litigationrelated to the spill is possible, but the damage amounts are uncertain.A. Journalize the contingent liabilities associated with the hazardous…arrow_forward
- An entity had the following liabilities on December 31, 2020: Accounts Payable 55,000 Unsecured notes, 8% due 7/1/2021 400,000 Accrued expenses 35,000 Contingent liability 450,000 Deferred tax liability 25,000 Senior bonds, 7%, due 3/31/2021 1,000,000 The contingent liability is an accrual for possible loss on a P1,000,000 lawsuit filed against the entity. The legal counsel expects the suit to be settled in 2021 and has estimated that the entity will be liable for damages in the range of P450,000 to P750,000. The deferred tax liability is expected to reverse in 2021. What amount should be reported on December 31, 2020 for current liabilities? None of theseNone of these 940,000940,000 1,490,0001,490,000 1,515,0001,515,000…arrow_forward3. Determine the implication of the following independent cases to the December 31, 2020financial statements as per PAS 37, on Provisions, Contingent Liabilities, and ContingentAssets.Case 1On December 5, 2020, an employee filed a P3,000,000 lawsuit against Lance Company fordamages suffered when one of the company’s equipment malfunctioned in August, 2020.In your inquiry of the company’s legal counsel, the legal counsel expects the company willlose the lawsuit and estimates the losses to be between P500,000 and P1,500,000. Theemployee has offered to settle the lawsuit out of court for P1,200,000, but Lance Companywill not agree to the settlement.Case 2Lance Company has guaranteed a loan of P2,000,000 of one of its key officers from a bankin 2020. By the time the financial statements of Lance Company were approved forissuance by its BOD, it is clear that the key officer is in financial difficulties and it is probablethat Lance Company will meet the guarantee.Case 3On December 20, 2020,…arrow_forwardBig Hitter Corp. is facing a class-action lawsuit in theupcoming year. It is possible, but not probable, that thecompany will have to pay a settlement of approximately$2,000,000 in the upcoming year. How would this fact bereported, if at all, in the financial statements prepared atthe end of the current month using GAAP?a. Report $2,000,000 as a current liability.b. Report $2,000,000 as a long-term liability.c. Describe the potential liability in the notes to thefinancial statements.d. Reporting is not required in this case.arrow_forward
- As of December 31 of the current year, Fernandez Company has prepared the following informa-tion regarding its liabilities and other obligations: Notes payable, of which $20,000 will be repaid within thenext 12 months. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150,000Interest expense that will result from existing liabilities overthe next 12 months. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,000Lawsuit pending against the company, in which $500,000is claimed in damages. Legal counsel can make no reasonableestimate of the company’s ultimate liability at this time . . . . . . . . . . . . . . . . . . . . 400,00020-year bond issue that matures in two years. The entireamount will be repaid from a bond sinking fund . . . . . . . . . . . . . . . . . . . . . . . . . . 750,000Accrued interest on the 20-year bond issue as of the balancesheet date . . . . . . . . . . . . . . . . . . .…arrow_forwardChoose the correct. Which of the following is not a liability that has priority in a liquidation?a. Administrative expenses incurred during the liquidation.b. Salary payable of $1,250 per person owed to 26 employees.c. Payroll taxes due to the federal government.d. Advertising expense incurred before the company became insolvent but not recorded until after the order of relief.arrow_forwardSE10-3 Contingent Liabilities Smith & Sons, Inc., received notification from a local attorney that the company was being sued for $5,000,000 for patent infringement. A review of the situation by the company’s CEO led to the conclusion that Smith & Sons had indeed infringed upon the other company’s patented product. Nonetheless, the CEO thought the amount of $5,000, 000 was excessive and intended to litigate the issue. How should the lawsuit be reported in Smith’s annual report?arrow_forward
- Contingent Liabilities Several months ago, Ayers Industries Inc. experienced a hazardous materials spill at one of its plants. As a result, the Environmental Protection Agency (EPA) fined the company $530,000. The company is contesting the fine. In addition, an employee is seeking $650,000 in damages related to the spill. Lastly, a homeowner has sued the company for $330,000. The homeowner lives 30 miles from the plant, but believes that the incident has reduced the home's resale value by $330,000. Ayers’ legal counsel believes that it is probable that the EPA fine will stand. In addition, counsel indicates that an out-of-court settlement of $280,000 has recently been reached with the employee. The final papers will be signed next week. Counsel believes that the homeowner's case is much weaker and will be decided in favor of Ayers. Other litigation related to the spill is possible, but the damage amounts are uncertain. a. Journalize the contingent liabilities associated with…arrow_forwardDescribe the conditions for when a contingent liability must be recorded through a journal entry, when it should be disclosed in the footnotes and when neither a journal entry nor disclosure is required? Assume that Mojito Corporation is sued by Dulcinea, Inc. for $1,000,000. Mojito’s attorneys believe that it is probable that the company will lose the suit and have to pay between $300,000 and $400,000 to Dulcinea. Based on your answer to a, what should Mojito do?arrow_forwardAxel Brick Company has a lawsuit pending from a customer claiming $100,000 in damages. Axel's attorney advises the likelihood the customer will win the lawsuit is reasonably probable. GAAP requires at a minimum that this contingent liability be... A. Disclosed in a note to the financial statements B. Record as a liability on the balance sheet C. Record as an expense on the income statementarrow_forward
- Survey of Accounting (Accounting I)AccountingISBN:9781305961883Author:Carl WarrenPublisher:Cengage LearningFinancial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage LearningEBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT