Question

Eastern Manufacturing is involved with several situations that possibly involve contingencies. Each is described below. Eastern’s fiscal year ends December 31, and the 2021 financial statements are issued on March 15, 2022.

1. Eastern is involved in a lawsuit resulting from a dispute with a supplier. On February 3, 2022, judgment was rendered against Eastern in the amount of $123 million plus interest, a total of $138 million. Eastern plans to appeal the judgment and is unable to predict its outcome though it is not expected to have a material adverse effect on the company.
2. In November 2020, the State of Nevada filed suit against Eastern, seeking civil penalties and injunctive relief for violations of environmental laws regulating hazardous waste. On January 12, 2022, Eastern reached a settlement with state authorities. Based upon discussions with legal counsel, the Company feels it is probable that $156 million will be required to cover the cost of violations. Eastern believes that the ultimate settlement of this claim will not have a material adverse effect on the company.
3. Eastern is the plaintiff in a $216 million lawsuit filed against United Steel for damages due to lost profits from rejected contracts and for unpaid receivables. The case is in final appeal and legal counsel advises that it is probable that Eastern will prevail and be awarded $120 million.
4. At March 15, 2022, Eastern knows a competitor has threatened litigation due to patent infringement. The competitor has not yet filed a lawsuit. Management believes a lawsuit is reasonably possible, and if a lawsuit is filed, management believes damages of up to $49 million are reasonably possible.

Required:
Prepare the appropriate journal entries for these situations.

journal entry worksheet

• Eastern is involved in a lawsuit resulting from a dispute with a supplier. On February 3, 2022, judgment was rendered against Eastern in the amount of $123 million plus interest, a total of $138 million. Eastern plans to appeal the judgment and is unable to predict its outcome though it is not expected to have a material adverse effect on the company

	Transaction General Journal Debit Credit a

Answer 1

No.	Transaction	General Journal	Debit	Credit
1	a	No journal entry required
2	b	Loss-litigation	156,000,000
		Liability-litigation		156,000,000
3	c	No journal entry required
4	d	No journal entry required
	Note:
	a	This is a loss contingency
		It is unlikely that Eastern would choose to accrue the $138 million loss
		A disclosure note is appropriate
	b	This is a loss contingency.
		Eastern should accrue the $156 million loss,
		ultimate outcome appears settled and the loss is probable.
	c	This is a gain contingency
		Gain contingencies are not accrued
		The gain should be recognized only when realized
	d	No disclosureis required
		The claim is as yet unasserted
		disclosure is not required unless an unasserted claim is probable.