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Problem 13-6 - the fine Part 2 disclosure note is needed to...

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Daniel McAdams Problem 13-6 1/25/10 Section A: Part 1: In litigation it is foolish to recognize a loss before the ultimate decision by the court is made. Such recognition could be seen as a form of admittance and used against you in court. In case A, the judgment occurred after the fiscal year but before the financial statements where to be issued. The company is planning to appeal the judgment and cannot predict its outcome. It does feel however that if there is a judgment it will not have a material adverse effect on the company. With this information the company should not report a loss at the current time. Part 2: The company should place disclosure notes in its financial statements. Section B: Part 1: Eastern Manufacturing, in its 2008 financial statements, should accrue a liability for 140 million and because Eastern the incident occurred in 2008 and the legal representation was able to reasonable estimate the amount of
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Unformatted text preview: the fine. Part 2: disclosure note is needed to explain the detail of the accrual. Date Account Debit Credit Dec-08 Litigation expense 140,000,000 Litigation liability 140,000,000 Section C: Part 1: Gains on litigation are not to be accrued and are only realized after the ultimate decision has been made. Even though Eastern is in the final appeal stage the gain should only be recognized when the final judgment is made. Part 2: A disclosure note should be placed in the financial statements minus any “misleading information that could show likely hood of the realization. Section D: Part 1: Since the assessment has not yet been proposed, following the two-step process, the company should not report anything because the assessment is only reasonable possible and not probable. Part 2:No journal entries or disclosure notes are needed....
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