Question

94 93% 10:34 AM Tue Heb 25 UJ CONTINYLIILILJ LO13-59, LO13-6 @ Eastern Manufacturing is involved with several situations that possibly involve contingencies. Each is described below. Eastern's fiscal year ends December 31, and the 2018 financial statements are issued on March 15, 2019. a. Eastern is involved in a lawsuit resulting from a dispute with a supplier. On February 3, 2019, judgment was rendered against Eastern in the amount of $107 million plus interest, a total of $122 million. Eastern plans to appeal the judgment and is unable to predict its outcome though it is not expected to have a material adverse effect on the company. b. In November 2017, the State of Nevada filed suit against Eastern, seeking civil Page 757 penalties and injunctive relief for violations of environmental laws regulating hazardous waste. On January 12, 2019, Eastern reached a settlement with state authorities. Based upon discussions with legal counsel, the Company feels it is probable that $140 million will be required to cover the cost of violations. Eastern believes that the ultimate this claim will not have a material adverse effect on the company. c. Eastern is the plaintiff in a $200 million lawsuit filed against United Steel for damages due to lost profits from rejected contracts and for unpaid receivables. The case is in final appeal and legal counsel advises that it is probable that Eastern will prevail and be awarded $100 million. d. At March 15, 2019, Eastern knows a competitor has threatened litigation due to patent infringement. The competitor has not yet filed a lawsuit. Management believes a lawsuit is reasonably possible, and if a lawsuit is filed, management believes damages of up to $33 million are reasonably possible. Required: 1. Determine the appropriate means of reporting each situation. Explain your reasoning. 2. Prepare any necessary journal entries and disclosure notes.

Answer 1

/1.

The approporiate means of reporting each situation would be

DISCLOSURE NOTE ONLY

These are contingencies, explanations are given below

2.

a	This is a case of contingent loss. Eastern can use the information occurring after the end of the year in determining appropriate disclosure. It is unlikely that Eastern would choose to accrue the loss because the judgement will be appealed. Note - Contingency In a lawsuit resulting from a dispute with a supplier, a judgement was against the EMC amounting to $122 million. EMC plans to appeal the judgement. While theoutcome currently cannot be ascertained, no amount can be reasonably estimated. This matter is not expected to have a material adverse impact.
b	This again is a case of contingent loss. EMC should accrue $ 140 million loss since the outcome appears to be settled and it is probable that it'll be against EMC. Note - Litigation In 2017, State of Nevada filed suit against the company, seeking penalties and injunctive relief for violations of environmental laws regulating hazardous waste. In 2019 EMC announced that it had reached a settlement with the authorities. Based on this EMC has accrued $ 140 million to cover anticipated costs of all violations. The company belived that the settlement will not have material adverse impact on financial position of EMC.
c	Eastern is a plaintiff in this case. This is a situation of a Contingent Gain. As per the standard, a contingent gain is not recognized even if the chances of receiving it are fairly high. Such gains are only recognized at the time of realization. A disclosure is required. Note - Contingency Eastern is the plaintiff in a pending lawsuit filed against united Steel for damages due to lost profits from rejected contracts and for unpaid receivables. The case is in final appeal. No amount has been accrued.
d	No disclosure is required in this case. The reason is quite simple, no lawsuit has been filed yet. The management believes the outcome to be reasonably possible. This means it is NOT PROBABLE. Disclosure is not required unless an unasserted claim is probable