Question

2. The following selected transactions relate to the liabilities of Stanton Corporation for 2018. Stanton's fiscal year ends on December 31. (1) In May 2018, Stanton became involved in litigation. In December 2018. A judgment for $800,000 was assessed against Stanton by the court. Stanton is appealing the amount of the judgment. Attorneys for Stanton feel that it is probable that they can reduce the assessment by 50%. No entries have been made by Stanton pending completion of the appeal process which is expected to take at least a year. (2) In July 2018, Madison County brought action against Stanton for polluting the Jordan River with its waste products. It is reasonably possible that Madison County will be successful, but the amount of damages that Stanton might have to pay should not exceed $200,000. No entry has been made by Stanton to reflect the possible loss. (3) Stanton signed as guarantor for a $50,000 loan by Guaranty Bank to Midwest Parts Inc., a principal supplier to Stanton. Because of financial problems at Midwest, it is probable that Stanton will have to pay the $50,000 with only a 40% recovery anticipated from Midwest. No entries have been made to reflect the contingent liability. INSTRUCTIONS: a. What amount should be reported as a liability on Stanton's December 31, 2018 Balance Sheet? Prepare the appropriate journal entries for the above situations. b.

Answer 1

1.The amount that should be reported should be based on best estimates available at the moment, as in the first case there is chance they can reduce the penalty by 50% therefore by there best judgement we should $400,000 as liability. In the second case they have to pay the whole $200,000 as fines therefore as we know sure that from the available best estimates that the liability would not be more then $200,000 then whole should be shown as liability in the balance sheet. In the 3 scenario from the best estimates possible we have to pay $50000 to the bank and from the available situation we can only recover 40% of the money from them because of that we need to recognise as liability remaining 60% as a liability on the balance sheet date i.e.

($50000*60%= $30000).

2.

Journal entries
Date	Particulars	Debit	Credit
31-12-2018	BY legal Fines A/c	$400,000
	To legal Fines Payable A/c		$400,000
	(Being provisions for legal fines payable created)
31-12-2018	BY legal Fines A/c	$200,000
	To legal Fines Payable A/c		$200,00
	(Being provisions for legal damages created)
31-12-2018	By loss on Guarantor A/c	$30000
	To Loss on Guarantor payable A/c		$30000
	(Being Proviso for loss on guarantee payable created)