Question

Problem 13-6 Various contingencies (LO13-5, 13-6] Eastern Manufacturing is involved with several situations that possibly involve contingencies. Each is described below. Eastem's fiscal year ends December 31, and the 2018 financial statements are issued on March 15, 2019 a. Eastem is involved in a lawsuit resulting from a dispute with a supplier On February 3, 2019. judgment was rendered against Eastem in the amount of $110 million plus interest, a total of $125 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 2017, 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, 2019, Eastern reached a settlement with state authorities. Based upon discussions with legal counsel the Company feels it is probable that $143 million will be required to cover the cost of violations. Eastern believes that the ultimate settlement of this daim will not have a material adverse effect on the company c. Eastern is the plaintiff in a $203 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 d. At March 15, 2019, 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 $36 million are reasonably possible. Required 1. Determine the appropriate means of reporting each situation 2. Prepare the appropriate journal entries for these situations Complete this question by entering your answers in the tabs below. Required 1 Required 2 Determine the appropriate means of reporting each itu | Stuation Situation Shuation Station

Answer 1

1. a. This is a loss contingency. But as the outcome of the appeal is uncertain, there is no need to accrue the $ 125 million loss. A disclosure note should be appropriate.

b. This is a loss contingency, and it is probable that $ 143 million would be required to cover the cost of violations. Hence Eastern should accrue a $ 143 million loss.

c. This is a gain contingency, and gain contingencies are not accrued. No journal entry would be required. However, a disclosure note in the financial statements would be necessary.

d. As the competitor has not yet filed the lawsuit, there is no need for a disclosure note, let alone accrual of the loss. Hence, no journal entry is required.

2.

Situation	Account Titles	Debit	Credit
		$	$
a.	No journal entry required	0	0
b.	Loss: Litigation	143,000,000
	Liability: Litigation		143,000,000
c.	No journal entry required	0	0
d.	No journal entry required	0	0