Question

P 13-6 Various contingencies • L013-5, L013-6 Easter 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 S107 million plus interest, a total of S122 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 $140 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 $200 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 S100 million d. At March 15, 2022, Eastern knows a competitor has threatened litigation due to patent infringement. The compositor 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 533 million are reasonably possible. Required: Determine the appropriate way to report each situation, and prepare any necessary journal entries and disclosure notes. Explain your reasoning,

Answer 1

Appropriate means of reporting each situation as follows:

a)

Disclosure Note on Contingency:

In the given case, management and legal counsel are presently unable to predict the outcome or to estimate the amount of any liability the company may have with respect to this lawsuit, it is not expected that this matter will have a material adverse effect on the company.

b)

Disclosure Note on Litigation:

Eastern should accrue the $140 million loss because the ultimate outcome appears settled and the loss is probable.

c)

Gain not recognize unless when they actually received it. Therefore should be disclosed in notes to the financial statements.

d)

No disclosure is required because the claim is as yet unasserted.

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Prepare Journal entries as follows:

Tru. Debit Credit Account Titles No journal entry required $140.000.000 Loss-Litigation Liability-Litigation $140.000.000 No journal entry required No journal entry required