Question

The Haynesworth Corporation is sued for $10 million in Year One. At the end of Year One, company officials believe a loss is only remote. However, the case drags on so that by the end of Year Two, company officials believe it is reasonably possible that a loss of $2 million could be incurred. The case goes to trial during Year Three, and company officials now believe that a loss of $3 million is probable. The case ends on April 23, Year Four, when the Haynesworth Corporation agrees to pay $2.6 million in cash to settle all claims. Indicate the amount of loss that will be reported by the Haynesworth Corporation in each of these four years. 6. On January 1, Year One, the Atlanta Company sues the Seattle Company for $100 million for patent infringement. The case is expected to take years to settle. For each of the following independent situations, indicate the financial reporting to be made by each company. a. Both companies believe that Atlanta will probably win this case. However, both feel that estimating the amount of this loss is virtually impossible. b. Both companies believe that Atlanta will probably win this case. Both feel that Atlanta will probably win approximately $9 million, but a win as high as $46 million is reasonably possible. c. Both companies believe that a loss by Seattle of $53 million is reasonably possible. d. Atlanta officials believe that their company will probably win $44 million whereas Seattle officials believe that their company will probably lose $8 million.

Answer 1

Answer for question 1-

As per the definition of recognition of contigent loss it is defined as potential loss that is dependent upon some future event occurring or not occurring. If the loss is probable and the amount can be estimated, then the loss and a liability are recorded with a journal entry. If the loss is only reasonably possible (not probable), then a journal entry is not recorded but a disclosure should be made in the notes to the financial statements. If the loss is remote, then neither a journal entry nor a disclosure is required.

Amount of loss to be reported by The Haynesworth Corporation for the different years is as follows :

• In the year 1 company issues $10 million which is recievable for the company at the end of the year 1 and the company believs the possible loss is remote. So as per the the above definition of recogniton of loss there should be a probable and reasonably estimation can be made But if in the year 1 company estimates the loss which is minimum and could not estimate reasonably then neither a journal entry nor a disclosure is required in such a case.
• In the year 2 company blieves that there could be a estimated loss of $2 million which is probable and reasonably estimated, so in the year 2 it has to recognise a loss of $2 million as as provision of contigent loss.
• In the year 3 The case goes to trial , and company officials now believe that a loss of $3 million is probable with available information with the company. As per the definition of recognition of Contigent loss, company is estimated a loss of $3 million out of which it had already made a provision of $2 million, so now it can provide for additional $1 million . At year 3 end company has a overall provision for contigent loss is $3 million.
• In the year 4, when the case is closed company had agrees to pay $2.6 million which is to be settled in cash as the company already made a provision for contigent loss of $3 million can settof its actual loss. Balance which is excess provisio of $.4 million can be reverse the provision which is no longer required.

Part- 2 :

Financial reporting to be made by each company for the mentioned each cases is as follows :

Case -1 - : In case 1 both the companies believes that atlanta probably win the case, Atlanta company is going to win the case as it estimates so there need not be any financial reporting for this company. But for Seattle Company believes that Atlanta company going to win and it is going to loose the case. But it believes that estimation of loss to Seattle Company is impossible.so it has to disclose the fact that it is going to lose the case and it could not able estimate in the financial statements .

Case -2- : In the case 2 both the companies believes that Atlanta company going to win the case in such a case Atlanta Company belives that it can win reasonable $9 million but a win as hig as $46 million is reasonable as per the defintion If it is probable that Company will win the lawsuit and receive an estimated amount of money, it has a contingent asset and a contingent gain then it will not report the asset and gain until the lawsuit is settled. But for the Seattle Company will need to make an entry in its accounts if the loss contingency is probable and the amount can be estimated. If one of those are missing, Company B will have to disclose the loss contingency in the notes to its financial statements.

Case-3 -: In case 3 both the company believes that Seattle company loss is $53 million is reasonable then in that case Atlanta case is going to win the case and it will not report the asset and gain until the lawsuit is settled actually. And for the Seattle company need to make an entry in its accounts probable contingency loss of $53 million and discluse the fact in the financial statement.

Case -4 -: As per the case 4 Atlanta offcials believes that it is going to win probably $44 million though as per the definition of recognition of contigent assets it will not report the asset and gain until the lawsuit is settled but it may prepare a very carefully worded disclosure stating that it possibly could win the case.But the company Seattle officials believe that their company will probable lose $8 million so it need to make an entry in its accounts for th probable contingency loss of $44 million and discluse the fact in the financial statement.