Question

Watch the following NBC video about Starbucks being sued for $5m over the amount of ice in iced drinks and then answer the following questions. Also, respond to a post made by one of your peers.

In which cases would Starbucks recognize a liability, disclose a contingent liability or do nothing about it?

Grading rubric:

Identification of the general accounting principles relating to loss contingencies.	2 points
Reference to the related section / page of the textbook.	0.5 point
Application of the accounting principles and conclusion.	2 points
Constructive response to a peer's post	0.5 point

Your post should not exceed 15 lines (about 250 words) and should focus only on the accounting principles relevant to the scenario. Include the following titles in your post:

• Relevant accounting principles
• Reference
• Application and conclusion

TRANSCRIPT of vidoe

Starbucks Sued for $5 Million Over the Amount of Ice in Drinks

LESTER HOLT, anchor:

Let’s talk now about the brewing coffee controversy at Starbucks. The target of a lawsuit which claims the company has been shortchanging its customers by overfilling their iced drinks with ice, and not enough of the actual beverage. NBC’s Tom Costello has details on this court battle.

TOM COSTELLO, reporting:

No stranger to controversy, coffee giant Starbucks is now the target of a lawsuit in which a customer in Illinois accused the Starbucks of "false and misleading marketing and sale of cold drinks." And that "Starbucks has engaged in the practice of misrepresenting the amount of cold drink a customer will receive." At issue, whether customers get more ice than drink when they order a Venti Iced coffee. The customer, Stacey Pincus, in Chicago, is seeking $5 million in damages. Outside a Maryland Starbucks today, mostly skeptical reviews.

MAN: I think it’s just somebody wanted to be upset about something.

WOMAN: What else are we going to start suing people for? What has-- what has the world come to?

COSTELLO: The suit includes a photo of a Starbucks cup and claims the black lines on the cup are meant to guide baristas across the country in how much liquid to use. And that while Starbucks advertises 24-fluid ounces on the menu, customers may only get 14 ounces. In a statement the company says, “Our customers understand and expect that ice is an essential component of any ‘iced’ beverage. If a customer is not satisfied with their beverage preparation, we will gladly remake it.” Only a few weeks ago Starbucks was accused of leaving too much room for foam in these drinks. The company said that’s without merit. Now, a customer, apparently, unsatisfied has decided that instead of going to a barista to get her drink remade, she was suing for $5 million. Lester.

HOLT: All right. Tom Costello, thanks.

Answer 1

Relevant accounting principles: Here the accounting principles of GAAP with regards to reporting requirements of contingent liabilities will be relevant. For Starbucks to disclose a contingent liability it should ensure that it must be possible to estimate the value of the contingent liability. If the value of the contingent liability can be estimated then the liability should have a chance that is greater than 50% of being realized. The qualifying contingent liabilities are recorded as an expense on the income statement and a liability on the balance sheet. If the contingent loss is remote then the liability will not be reflected in the balance sheet. As such any questionable contingent liabilities i.e. contingent liabilities that are questionable before their value can be determined has to be disclosed in the footnotes to the financial statements.

Reference: Guidelines established in the Generally Accepted Accounting Principles (GAAP).

Application and conclusion: In this case Starbucks will rely on precedent and legal counsels to ascertain likelihood of damages in this case. If Starbucks ascertains that court is likely to rule in favor of the customer (i.e. the plaintiff) then Starbucks will have to report a contingent liability in this case and the amount reported will have to be equal to the amount of probable damages. On the other hand if, after legal counsel, Starbucks determines that the case is frivolous then there may be no need for disclosure. Here the case seems frivolous and Starbucks will provide a footnote for the same and no liability will be recognized in balance sheet.

(256 words)