Question

Eastern Manufacturing is involved with several situations that possibly involve contingencies. Each is described below. Eastern's fiscal year ends December 31, and the 2021 financial statements are issued on March 15, 2022. a. Eastern is involved in a lawsuit resulting from a dispute with a supplier. On February 3, 2022, judgment was rendered against Eastern in the amount of $121 million plus interest, a total of $136 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 2020, the State of Nevada filed suit against Eastern, seeking civil penalties and injunctive relief for violations of environmental laws regulating hazardous waste. On January 12, 2022, Eastern reached a settlement with state authorities. Based upon discussions with legal counsel, the Company feels it is probable that $154 million will be required to cover the cost of violations. Eastern believes that the ultimate settlement of this claim will not have a material adverse effect on the company. c. Eastern is the plaintiff in a $214 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 $150 million. d. At March 15, 2022, 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 $47 million are reasonably possible. Required: 1. Determine the appropriate way to report each situation. 2. Prepare the appropriate journal entries for these situations. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Prepare the appropriate journal entries for these situations. (If no entry is required for a transaction/event, select "No journal entry required" In the first account field. Enter your answers in whole dollars.) View transaction list

Answer 1

Required 1

Situation A = Disclosure note only

Here the outcome is not predictable so we cannot journalize the activity. A disclosure note would be sufficient. The event took place before the issue of financial statements on March 15, 2022. The total awarding amount of this situation is $136 million which includes interest. This can be considered as a loss contingency.

Situation B = Accrual & Disclosure note

Here the outcome is predictable and this comes under loss contingency. As it is predictable, journal entry in books of accounts would be needed and accrue the loss of $154 million. Also disclosure note is required.

Part C = Disclosure note only

It is a gain contingency. It is predictable and could be estimated. But as the gain contingencies are not accrued, we do not need journal entry. Gain will be recognized when realized so no journal entry is required. A disclosure will be sufficient.

Part D = No action Required

No disclosure is needed as the claim is not yet asserted, meaning no lawsuit is filed.

Required 2

Transaction	General Journal	Debit	Credit
a	No journal entry required
b	Loss - Litigation	154,000,000
	Liability - Litigation		154,000,000
c	No journal entry required
d	No journal entry required