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. a. 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 $112 million plus interest, a total of $127 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. b. 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 $145 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. c. Eastern is the plaintiff in a $205 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 $100 million. d. 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 $38 million are reasonably possible. Required: 1. Determine the appropriate way to report each situation 2. Prepare the appropriate journal entries for these situations.

Answer 1

1. Determine the appropriate means of reporting each situation
a. 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 $112 million plus interest, a total of $127million. 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.	Disclosure note only
b. 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 $145 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.	Disclosure note only
c. Eastern is the plaintiff in a $205 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 $100 million.	Disclosure note only
d. At March 15, 2022, the Environmental Protection Agency is in the process of investigating possible soil contamination at various locations of several companies including Eastern. The EPA has not yet proposed a penalty assessment. Management feels an assessment is reasonably possible, and if an assessment is made an unfavorable settlement of up to $38 million is reasonably possible.	Disclosure note Required
2. Prepare any necessary journal entries and disclosure notes.
a) No journal entry is required	This is a loss contigency. In this case as the outcome is uncertain and judgement will be appealed therefore there is no need to accrue $127 million loss.
b)
Account Titles	Debit	Credit
Loss-Litigation	$145,000,000.00
Liability- Litigation		$145,000,000.00
	This is a loss contigency. In this case as the outcome appears settled and loss is probable
C) No journal entry is required	This is Gain contingency.Gain Contigency are not accrued even if gain is probable and can be reliably estimated
d) No Jounal entry is required	The claim here is unasserted as the competitor has not yet file a law suit