Consider the Following Independent Situations

question 36

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.
Required:
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 provides 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:

Gastric Acid Production

The process by which the stomach produces hydrochloric acid necessary for digestion.

Cleft Lip and Palate

Congenital deformities affecting the upper lip and roof of the mouth, respectively, that can impair speech, eating, and hearing.

Gastrostomy Feedings

Nutritional support provided through a tube placed directly into the stomach for those who cannot eat by mouth.

Sucking Needs

The innate need for sucking movements seen in infants, critical for feeding and offers comfort.