A. As a result of uninsured accidents during the year, personalinjury suits for $400,000 and $70,000 have been filed against thecompany. It is the judgment of XYZ Company's legal counsel that anunfavorable outcome is unlikely in the $70,000 case but that anunfavorable verdict approximating $300,000 will probably result inthe $400,000 case.
B. On December 31, 2017, High Tech, Inc. learned that itscompetitor had introduced a product using a software developmentover which High Tech has exclusive patent rights. High Tech filedsuit and its attorneys felt, it was probable that the companyshould recover at least $600,000. The companyâs December 31, 2017year-end financial statements were issued on March, 15, 2018.
C. At the end of its first year of operations, the MedinaCompany has a balance in accounts receivable of $1,500,000. Basedon an aging of the accounts receivable, the company believes itprobable that it will be unable to collect $70,000 of thesereceivables.
D. Chemco's chemical product division consisting of five plantsis uninsurable because of the special risk of injury to employeesand losses due to fire and explosion. The year 2017is consideredone of the safest (luckiest) in the division's history because noloss due to injury or casualty was suffered. Having suffered anaverage of three casualties a year during the rest of the pastdecade (ranging from $100,000 to $800,000), management is certainthat next year the company will probably not be so fortunate.
E. ABC Credit Cards Inc is being sued for antitrust violationsrelated to its credit card activities. The companyâs attorneysbelieve that it is probable that findings of antitrust violationswill be sustained against the company. The attorneysâ estimate oflosses is from $20,000,000 to $40,000,000, with the most likelyexpected settlement to be around $25,000,000.
F. ABC Credit Cards Inc is being sued for antitrust violationsrelated to its credit card activities. The companyâs attorneysbelieve that it is probable that findings of antitrust violationswill be sustained against the company. The attorneysâ best estimateof losses is from $20,000,000 to $40,000,000, with no amount withinthe range more likely than any other.
G. The company sells certain products with lithium batteries forwhich it is sued from time to time for losses due to fires fromspontaneous overheating of the batteries. At the end of the yearthe company believes that there are unasserted claims that itslegal counsel believes probably will be asserted and that thelosses may range from $1,000,000 to $2,000,000.
Required:
For each situation, discuss how and whether the contingencyshould be reflected in the companyâs financial statements. If thecontingency should be accrued, prepare the journal entry. If thecompany were following IFRS, would the answer be different on anyof the situations described?
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