Question

P 13–6 Various contingencies QL013–5, 1013–6 Eastern Manufacturing is involved with several situations that possibly involve contingencies. Each is described below. Eastern's fiscal year ends December 31, and the 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 $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 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 $140 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 $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, 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 $33 million are reasonably possible. Required: Determine the appropriate way to report each situation, and prepare any necessary journal entries and disclosure notes. Explain your reasoning.

Answer 1

Refer the below images for the above asked questions in a detailed way of explanation.
Answer: a) This is a loss contingency Eastern can use the information occoring after the end of the year in determining appropriate disclosure. It is unlikely that eastern would choose to accrue the $122 million loss because the judgement will be appealed and that outcome is uncertain. A disclosure note is appropriate : Note X: contingency In a lawsuit resulting from a dispute with a supplier a judgement was rendered against Eastern manufacturing Corporation in the amount of & 107 million plos interest, a total of $ 122 million at February 3, 2022 Eastern plans to appeal the judgement. while management and legal counsel are presently unable to predict the outcome on to estimate the amount of any liability the company may have with respect to this lawsuit, it is not expected that this matter will have a material adverse effect on the company. b) This is a loss contingency Eastern can use the occuring after the end of the year in determining disclosure. Eastern should accrue the 140 million the ultimate outcome appears settled and the probable. information appropriate loss because loss is * $ 140 000 000 Loss - litigation All or To Liability - litigation $ 140 000 000 A disclosure note also is appropriate:

Notes: Litigation In November 2020, the state of Nevada filed suit against the company seeking civil penalties and injuctive relief for violations of environmental laws regulating hazardous waste on January 12, 2022, the company announced that it had reached a Settlement with state authorities on this matter. Based upon discussions with legal counsel, the company has accrued and charged to operations in 2020 $ 140 Million to cover the anticipated cost of all violations. The ons. The company company believes believes the that ultimate the Settlement of this claim will not have a material adverse effect on the company's financial position. c) This is a goin contingency. Gain contingencies are not even if the gain is probable & reasonably estimable. gain should be recognized only when realized. Though contingencies are not recorded in the accounts, they be disclosed on notes to the financial Statements a accrued The gain should Note X: contingency Eastern is the plaintiff in a pending lawsuit filed against United Steel for damages due to lost profits rejected contracts and for unpaid receivables. The case is in final appeal. No amount has been accroed in the financial Statements for possible collection of any claims in this litigation a

d) yet probable No disclosure is required because the claim is as chasserted (no lawsuit has been filed) and it is not that a claim will be asserted in the future. Even if an unfavourable outcome is thought in the event a lawsuit is filed, and even amount of losses that could result from is estimable, disclosure is not required unasserted claim is probable. to be favourable if the the lawsuit unless an