Consider the Following Independent Situations

question 30

Essay

Consider the following independent situations. The underlined entity is the reporting entity.
1. The Supreme Court of Canada ordered a supplier to pay Towna Haring Inc. $500,000 for breach of contract.
2. Iwas Pharmaceuticals Inc. sued Game Day Agencies Ltd. for $8 million alleging patent infringement. While there may be some substance to Iwas's assertion,Game Day's legal counsel estimates that Iwas's likelihood of success is about 30%.
3. Environment Canada sued Foil Fan Isotopes Ltd. for $18 million seeking to recover the costs of cleaning up Foil Fan's accidental discharge of radioactive materials. Foil Fan acknowledges liability but is disputing the amount,claiming that the actual costs are in the range of$9 million to $12 million. Foil Fan's $18 million environmental insurance policy includes a $6 million deductible clause.
Requirement:
a. For each of the situations,indicate whether the appropriate accounting treatment is to:
A. Recognize an asset or liability.
B. Disclose the details of the contingency in the notes to the financial statements.
C. Neither provide for the item nor disclose the circumstances in the notes to the financial statements. b. For each situation that requires the recognition of an asset or liability,record the journal entry.

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Definitions:

Ending Inventory

Merchandise value ready for sale at the close of an accounting cycle.

Consistency Principle

An accounting standard that mandates entities to apply the same accounting methods and practices from period to period.

Expense Recognition Principle

This principle dictates that expenses should be recognized in the accounting period when they are incurred, not necessarily when they are paid, matching expenses to the revenues they help generate.

Physical Flow Assumption

An accounting method that tracks the physical movement of goods in inventory, often used to calculate cost of goods sold or ending inventory.