The items 1 through 6 below represent various commitments and contingencies of Martin Inc. at December 31, 2011 and events subsequent to December 31, 2011, but prior to the issuance of the 2011 financial statements. Martin Inc. is preparing its financial statements for the year ended December 31, 2011.
1. On December 1, 2011, Martin was awarded damages of $75,000 in a patent infringement suit it brought against a competitor. The defendant did not appeal the verdict, and payment was received in January 2012.
2. A former employee of Martin has brought a wrongful-dismissal suit against Martin. Martin’s lawyers believe the suit to be without merit.
3. At December 31, 2011 Martin had outstanding purchase orders in the ordinary course of business for purchase of a raw material to be used in its manufacturing process. The market price is currently higher than the purchase price and is not anticipated to change within the next year.
4. A government contract completed during 2011 is subject to renegotiation. Although Martin estimates that it is reasonably possible that a refund of approximately $200,000-$300,000 may be required by the government, it does not wish to publicize this possibility.
5. Martin has been notified by a governmental agency that it will be held responsible for the cleanup of toxic materials at site where Martin formerly conducted operations. Martin estimates that it is probable that its share of remedial action will be approximately $500,000.
6. On January 5, 2012, Martin redeemed its outstanding bonds and issued new bonds with a lower rate of interest. The reacquisition price was in excess of the carrying amount of the bonds.
You have been asked by Martin Inc. to advice on the treatment of the above items for financial accounting and reporting purpose. Prepare a detailed report discussing the relevant FASB codifications how the above six items should be accrued, accrued and disclosed, disclosed only Or should neither be accrued nor disclosed.
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