Accountancy
Analyzing Contingencies and Assessing Liabilities
The following independent situations represent various types of liabilities. Analyze each situation and indicate which of the following is the proper accounting treatment for each company: (1) record in accounts, (2) disclose in a financial statement footnote, or (3) neither record nor disclose.
a. A stockholder has filed a lawsuit against Clinch Corporation. Clinch’s attorneys have reviewed the facts of the case. Their review revealed that similar lawsuits have never resulted in a cash award and it is highly unlikely that this lawsuit will either.
b. Foster Company signed a 60-day, 10% note when it purchased (and received) items from another company.
c. The Department of Environment Protection notifies Shevlin Company that a state where it has a plant is filing a lawsuit for groundwater pollution against Shevlin and another company that has a plant adjacent to Shevlin’s plant. Test results have not identified the exact source of the pollution. Shevlin’s manufacturing process often produces by-products that can pollute ground
d. Sloan Company manufactured and sold products to a retailer that sold the products to consumers. The Sloan Company warranty offers replacement of the product if it is found to be defective within 90 days of the sale to the consumer. Historically, 1.2% of the products are returned for replacement.
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