Classify Each of the Following Events as a Commitment, a Subsequent

question 49

Essay

Classify each of the following events as a commitment, a subsequent event or a contingency.Support your decisions.Some may fit more than one classification.For each one, indicate how it would be reflected in the company's financial statements.Assume a December 31 year-end for all companies; assume all amounts are material unless otherwise noted.
A) On November 15, a customer became ill after eating in one of the restaurants operated by the company.The customer is suing the company for lost wages and damages totalling $50,000.No other customers have complained to the company about similar problems, so the company's lawyers believe the claims are without merit.The amount of the claim is very small relative to the company's overall business.
B) A company guarantees a $2,000,000 loan of a subsidiary.They have been the guarantor for five years and have never had to act on their guarantee.
C) On September 30, the company renewed the lease on their office space for five years at a monthly payment of $20,000.
D) On July 1, the company entered into an agreement with its supplier to buy $500,000 worth of goods, based on prices in effect on that date, per year for the next five years.The company is pleased to have the supply assured over the next five years, although to date purchases from that supplier have never exceeded $400,000.E) On January 31, the company issued $5,000,000 in bonds.

• A) On November 15, a customer became ill after eating in one of the restaurants operated by the company.The customer is suing the company for lost wages and damages totalling $50,000.No other customers have complained to the company about similar problems, so the company's lawyers believe the claims are without merit.The amount of the claim is very small relative to the company's overall business.
• B) A company guarantees a $2,000,000 loan of a subsidiary.They have been the guarantor for five years and have never had to act on their guarantee.
• C) On September 30, the company renewed the lease on their office space for five years at a monthly payment of $20,000.
• D) On July 1, the company entered into an agreement with its supplier to buy $500,000 worth of goods, based on prices in effect on that date, per year for the next five years.The company is pleased to have the supply assured over the next five years, although to date purchases from that supplier have never exceeded $400,000.E) On January 31, the company issued $5,000,000 in bonds.

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Definitions:

Preventive Maintenance

A plan that involves routine inspections, servicing, and keeping facilities in good repair to prevent failure.

Efficiency Level

A measurement of how well an entity uses its resources to achieve goals, often defined by the ratio of useful output to total input.

Theory Of Constraints

is a management philosophy focusing on identifying and managing the most critical limiting factor (constraint) that stands in the way of achieving a goal.

Constrained Workstations

Work areas within a production process that have limitations or restrictions affecting throughput or output.