Question

In: Accounting

Presented below are two independent situations. Answer the question at the end of each situation. 1.  ...

Presented below are two independent situations. Answer the question at the end of each situation.

1.   During 2020, Salt-n-Pepa Inc. became involved in a tax dispute with the IRS. Salt-n-Pepa Inc. believe it is probable that the company will lose this dispute and have to pay the IRS $900,000. How should Salt-n-Pepa Inc. report this contingency as of December 31st, 2020 (fiscal year end)? If needed, prepare the journal entry for Salt-n-Pepa Inc.

Debit

Credit

2.   Etheridge Inc. had a manufacturing plant in Sudan, which was destroyed in the civil war. Etheridge has been assured by governmental officials that it will receive a definite amount for this plant. The amount of the compensation will be more than its book value. How should Etheridge Inc. report this contingency?

Solutions

Expert Solution

1.

Contingency liability = $900,000

According to FASB, if it is possible to get better estimated from the range of expected loss then that amount is considered to be accrued and in case of no better estimate, the amount at the lowest end of the range is considered to be accrued whereas the amount at the highest end is to be disclosed. Here Salt-n-Pepa Inc believe it is probable that the company will lose this dispute and have to pay the IRS $900,000. Hence, the liability of $900000 is reported by Salt-n-Pepa Inc. at December 31, 2020.

Journal Entry:-

Loss in Tax dispute $900,000

Contingent Liability $900,000

2.

No contingency should be reported in the financial statements of Etheridge Inc.

The amount that will be received is going to be higher than the book value of the plant and thus it is considered a gain contingency. Gain contingency is not recorded until it is actually received. It is just disclosed.

kindly give a ?. It helps me. Thanks!!

ekkarill92 answered 2 years ago
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