Concept explainers
Contingencies Fallon Company, a toy manufacturer that also operates several retail outlets, is preparing its December 31, 2019, financial statements. It has identified the following legal situations that may qualify as contingencies:
A customer is suing the company for $800,000 in damages because her child was injured in November 2019 while riding an escalator that stopped suddenly in one of its stores. The child was hurt when he tripped and fell while walking “down” an escalator that was going “up.” Legal counsel feels that the child is partially at fault, but that it is probable that the lawsuit will be settled for between $ SO,000 and $100,000, with $80,000 being the most likely amount.
Fallon has discovered that a skateboard it began manufacturing and selling in 2019 has defective bearings, sometimes causing a wheel to fall off. Fallon has issued a “recall” notice in newspapers and magazines in which it offers to replace the bearings. It estimates a cost of $200,000 for these repairs. No lawsuits have been filed for injury claims, although the company feels that there is a reasonable possibility that claims may total as high as $2 million.
Fallon has an incinerator behind one of its retail outlets which is used to burn cardboard boxes received in shipments of inventory from suppliers. The state environmental protection agency filed suit against the company in August 2019 for air pollution. Fallon expects to stop using the incinerator and begin recycling. However, its lawyers believe that it is probable that a fine of between $40,000 and $60,000 will be levied against the company, although they cannot predict the exact amount.
In early 2019, Fallon signed a contract with a computer vendor to install “state of the art” cash registers in all of its retail outlets. Because of the vendor’s inability to acquire sufficient cash registers, the vendor canceled the contract. Fallon has filed a breach of contract suit against the vendor, claiming $300,000 in damages. The company’s lawyers expect that it will settle the suit “out of court” for $150,000.
Required:
Next Level For each situation, prepare the
How would your answers change if Fallon used IFRS?
Trending nowThis is a popular solution!
Chapter 9 Solutions
Intermediate Accounting: Reporting And Analysis
- Pending Damage Suit Disclosure On December 15, 2019, a truck driver for Cork Transfer Company negligently rounded a curve that was also a bridge covering several local merchant shops. The truck jumped the guardrail and fell 30 feet onto one of the shops, causing highly flammable chemicals in the truck to explode. Although by February 22, 2020 (the date on which Corks financial statements for 2019 are issued), no claims had been filed against Cork, the companys legal counsel believes it is probable that some will be filed in the future. However, counsel does not believe it can reasonably estimate the amount of these potential claims. Required: Explain the accounting treatment, if any, Cork should give the contingent loss occurring from the wreck in the December 31, 2019, financial statements.arrow_forwardOn November 5, 2020, a ABC Corporation truck was in an accident with an auto driven by nel. ABC received notice on January 12, 2021 of a lawsuit for P700,000 damages for personal injuries suffered by nel. ABC’s counsel believes it is probable that Nel will be awarded an estimated amount in the range between P200,000 and P450,000, and that P300,000 is a best estimate of potential liability than any other amount. ABC’s accounting year ends on December 31, and the 2020 financial statements were issued on March 2, 2021. What amount of loss should ABC accrue at December 31, 2020? Group of answer choices A. 450,000 B. 0 C. 300,000 D. 200,000arrow_forwardReporting a Legal Contingency On November 5, 2020, a Dune Corporation truck was in an accident with an auto driven by R. Bell. Dune received notice on January 12, 2021, of a lawsuit for $770,000 in damages for personal injuries suffered by Bell. Dune Corporation’s legal counsel believes it is probable that Bell will be awarded an estimated amount in the range between $220,000 and $495,000, and that $330,000 is a better estimate of potential liability than any other amount. Dune’s accounting year ends on December 31, and the 2020 financial statements were issued on March 2, 2021. a. What liability should Dune accrue on December 31, 2020? Amount to accrue Answer b. How would your answer to (a) change if Dune Corporation’s legal counsel believes it is reasonably possible that Bell will be awarded a settlement? Amount to accrue Answer c. How would your answer to (a) change if Dune Corporation’s legal counsel believes there is only a remote possibility that Bell…arrow_forward
- After a wedding in 2018, ten people died, possibly as a result of food poisoning from products sold by Ziem Catering Services. Legal proceedings have commenced, seeking damages from Ziem Catering Services but it disputes liability. Up to the date of approval of the financial statements for the year to 31 December 2018, Ziem Catering Services’ lawyers advised that it is probable that it will not be found liable.However, when Ziem Catering Services prepares the financial statements for the year to 31 December 2019, its lawyers advice that, owing to developments in the case, it is probable that it will be found liable. Required:In accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, what is the required accounting treatment?i. At 31 December 2018?ii. At 31 December 2019?arrow_forwardA truck owned and operated by Ward Company was involved in an accident with an auto driven by Stillman on January 12, 2020. Ward Company received notice on April 24, 2020 of a lawsuit for P800, 000 damages for a personal injury suffered by Stillman. Ward’s counsel believes it is reasonably possible that Stillman will be successful against the company for an estimated amount in the range between P100, 000 and P400, 000. No amount within this range is a better estimate of better potential damages than any other amount. It is expected that the lawsuit will be adjudicated in the latter part of 2021. What amount of loss should Ward accrue at December 31, 2020?arrow_forwardOn December 13, 2019, ABC Company was in an accident with an automobile driven by DEF. ABC received notice on December 31,2019 of a lawsuit for P600,000 damages for personal injuries suffered by DEF. ABC's counsel believes it is probable that DEF will be awarded an estimated amount in the range between P300,000 and P600,000 and that P 450,000 is a best estimate of potential liability. ABC’s accounting year ends on December 31 and the 2019 financial statements were issued on March 2, 2020. On April 30,2020,before the financial statements were issued, ABC settled DEF for the amount of P 500,000.What amount of liability should ABC Company recognize at December 31, 2019? P 600,000 P 300,000 P 500,000 P 450,000arrow_forward
- A customer is suing Ephiyu Company for P550,000 in damages because her child was injured in November 2022 while riding an escalator that stopped suddenly in one of its state-of-the-art stores in Makati. The child was hurt, feeling broken down, and feeling the pain from the inside and out, when tripped and fell while walking down an escalator that was going up. Legal counsel feels that the child is partially at fault, and so deserves all the pain, but that it is probable that the lawsuit will be settled for between P250,000 and P550,000, with the following likely outcome: 30% to be settled at P250,000; 45% to be settled at P340.000 and 25% to be settled at P550,000. How much provision for damages shall be included in the liability section as of December 31, 2022?arrow_forwardOn December 31, 2019, Home Company was a defendant in a pending lawsuit. The suit arose from the alleged defect of a product that Home sold in 2015. In the opinion of Home’s attorney, it is probable that Home will have to pay P500,000 and it is reasonably possible that Home will have to pay additional P100,000 as a result of this lawsuit. What amount needs to be disclosed only?arrow_forwardOn December 13, 2019, TJH Company was in an accident with an automobile driven by DEF. TJH received notice on December 31,2019 of a lawsuit for P600,000 damages for personal injuries suffered by DEF. TJH's counsel believes it is probable that DEF will be awarded an estimated amount in the range between P300,000 and P600,000 and that P 450,000 is a best estimate of potential liability. TJH’s accounting year ends on December 31 and the 2019 financial statements were issued on March 2, 2020. On April 30,2020,before the financial statements were issued, TJH settled DEF for the amount of P 500,000.What amount of liability should TJH Company recognize at December 31, 2019?arrow_forward
- On July 1, 2020, Ben entered a litigation case with Yona over unauthorized use of Yona’s latest technology. On September 1, 2020, Ben’s lawyers estimated that there is a 70% probability that Ben will lose in the next hearing that will be held on February 2, 2021. Ben stood to pay a maximum of $1,000,000 penalty by the court if proven guilty. Instructions: a. Why should Ben report this case on its Statement of financial position? b. How is the impact of this litigation Ben’s financial statement for 31 December 2020? c. If, October 15, 2020, the legal team finds new evidence for the claim against Ben, and revise the likelihood of Ben winning the case to 70%, how should this be shown in the financial statements?arrow_forwardSunrise Company provided the following information on December 31, 2019: A personal injury liability suit for P500,000 was brought against Sunrise Company in March 2019. The management and legal counsel of Sunrise Company concluded that it is not probable that Sunrise Company will be responsible for damages and that P150,000 is the best estimate of the damages. In July 2019, Sunrise Company became involved in a tax dispute with the BIR pertaining to 2018 income tax. In December 2019, a judgment for P400,000 was assessed against Sunrise Company by the tax court. Sunrise Company is appealing the amount of judgment. The tax advisor and legal counsel of Sunrise Company believed it is probable that the assessment can be reduced on appeal by 50%. Sunrise Company signed as guarantor for P200,000 loan by PNB to Sunset Company, a principal supplier of Sunrise. By reason of financial difficulties, it is probable that Sunrise Company shall pay P200,000 loan with only a 60% recovery anticipated…arrow_forward
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning