Question

APPLY YOUR KNOWLEDGE Serial Case C8-53. (Learning Objective 5: Analyze contingent liabilities of a company in the restaurant industry) Note: This case is part of The Cheesecake Factory serial case contained in every chapter in this textbook. Like many other large companies, The Cheesecake Factory Incorporated has several legal actions pending against it at any given time. It must accrue for and/or disclose certain contingent liabilities, such as pending or possible legal actions, in its financial statements and notes to its financial statements. The necessary reporting depends on the specific circumstances of the situations and the company's attorneys' assessment of the potential outcomes. To follow are four hypothetical legal situations that might face The Cheesecake Factory Situation A: A former restaurant employee filed a class-action lawsuit alleging that The Cheesecake Factory violated the local law when it required employees to purchase their work uniforms. Legal counsel has indicated that the case will probably be settled for $2,500. Situation B: A customer filed a lawsuit alleging that The Cheesecake Factory was negligent when she slipped and fell on a wet floor near the bar area in a Cheesecake Factory in Topeka, Kansas. Legal counsel has indicated that the company will most likely settle this case, but counsel is unable to estimate the dollar amount of the settlement. Situation C: A customer filed a lawsuit alleging that The Cheesecake Factory caused her severe emotional distress when her favorite dessert was out of stock for her birthday dinner at the restaurant. Legal counsel has indicated that the chance of losing this lawsuit is remote. Situation D: A former restaurant hourly employee filed a class-action lawsuit for $200,000 alleging that The Cheesecake Factory violated the local law by failing to pay overtime. Legal counsel has stated that it is reasonably possible, but not probable, that The Cheesecake Factory could lose the lawsuit. Requirement 1. Describe the accounting treatment for each of the contingent liabilities listed. Support your answers.

Answer 1

Question: Describe the accounting treatment for each suituation Solution: Contigent liability should be disclosed in the financial statements if the following conditions satisfied: 1 There should be present obligation arising out of past event but not recognised as provision 2 it is not porobable that an out flow of the resources embodying econimic benefits required to settle the obligation 3 The possibility of an outflow of resources embodying economic benefits is not remote 4 The amount of obligation cannot be measured with sufficient reliabilty to recognised as provison In the above Question the following Events that are affecting the contigent Liability shall be disclosed Suituations Page 1 Analyse Conclusion Possibility of an outflow is not remote F or the purpose of disclosure of contigent therefore disclosure by way of note should be liability by way of pote amount may be required $2.500 Here, the possible obligation and taking of It is assumed tha it is not a remote and the all evidences available, it is more likely than details of the corresponding shall be clearly not that a present obligation a the balance expressed by way of notes as contigent sheet date liability The case clearly states at chances of loosing the suit is remote, hence no disclosure No disclosure required were the possible required obligation is remote. in this case the legal councel states that it is for the purpose of disclosure of contigent not probable and not remote, hence the liability by way of note amount may be disclosure is necessary for the same $200,000/