Consider the Following Independent Situations

question 40

Essay

Consider the following independent situations. The underlined entity is the reporting entity.
1. Call Cattle Inc. sued Nutrient Feed Ltd. for $10 million alleging breach of contract. Nutrient's legal counsel estimates that Call's likelihood of success is about 80%. Based on its experience with cases of this nature, the law firm estimates that, if successful, the litigants will be awarded $8,800,000 to $9,000,000, with all payouts in this range being equally likely.
2. Deana Finnamore broke her leg when she tripped on an uneven floor surface in Groton Co.'s office. On the advice of legal counsel, Groton has offered Finnamore $140,000 to settle her $275,000 lawsuit. It is unknown whether Finnamore will accept the settlement offer. Groton's legal counsel estimates that Finnamore has a 90% probability of success, and that if successful, she will be awarded $230,000.
3. The courts ordered a competitor to pay $1,000,000 to Ferbert and Finn Corp. for patent infringement. The competitor's legal counsel indicated that the company will probably appeal the amount of the award.
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 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:

CPI

A metric known as the Consumer Price Index evaluates the overall weighted pricing of a range of consumer items and services, covering areas such as healthcare, food, and transportation.

Raise

An increase in salary or wages.

Weakens

To become lesser in strength, value, or severity.

US$

The United States dollar, the official currency of the United States of America.