Below Are Three Independent Situations

question 166

Essay

Below are three independent situations.1. In August, 2014 a worker was injured in the factory in an accident partially the result of his own negligence. The worker has sued Barkley Co. for $800,000. Counsel believes it is reasonably possible that the outcome of the suit will be unfavorable and that the settlement would cost the company from $250,000 to $500,000.2. A suit for breach of contract seeking damages of $2,400,000 was filed by an author against Henderson Co. on October 4, 2014. Henderson's legal counsel believes that an unfavorable outcome is probable. A reasonable estimate of the award to the plaintiff is between $800,000 and $1,800,000. No amount within this range is a better estimate of potential damages than any other amount."3. Kroft is involved in a pending court case. Kroft's lawyers believe it is probable that Kroft will be awarded damages of $1,000,000.
InstructionsDiscuss the proper accounting treatment, including any required disclosures, for each situation. Give the rationale for your answers."

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Definitions:

Variable Costing

An accounting method that includes only variable production costs—such as materials, labor, and overhead—in the cost of goods sold, while fixed costs are expensed in the period they are incurred.

Fixed Overhead Cost

Costs that do not vary with production volume, such as rent, salaries, and insurance, and must be paid regardless of the level of output or sales.

Ending Inventory

The value of goods available for sale at the end of an accounting period, which will be carried over as the beginning inventory for the next period.

Variable Costing

An accounting method that only considers variable costs (costs that change with production volume) in the cost of production, excluding fixed costs.