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5. Argo Motor Company, a motorcycle manufacturer, had the following contingencies: a. Argo estimates that it...

5. Argo Motor Company, a motorcycle manufacturer, had the following contingencies:

a. Argo estimates that it is reasonably possible that it will lose a current lawsuit. Argo’s attorneys estimate that the potential loss will be $2,200,000.

b. Argo received notice that it is being sued. Argo is advised by its attorneys that the lawsuit is considered frivolous.

c. Argo is currently the defendant in a lawsuit. Argo believes it is probable that it will lose the lawsuit. Estimated damages to be paid will be between $70,000 - $100,000. Argo’s attorneys believe the judge will award the plaintiff approximately $90,000.

d. Argo recently filed a lawsuit against the manufacturer of a brake pedal used in a popular motorcycle sold by Argo, which had to be recalled due to a defective braking system. Argo is seeking damages of $1,500,000. Argo feels confident that it will be awarded the full amount of damages it is seeking.

Determine the appropriate accounting treatment for each of Argo’s contingencies

Solutions

Expert Solution

a. Argo estimates that it is reasonably possible that it will lose a current lawsuit. Argo’s attorneys estimate that the potential loss will be $2,200,000. Describe the situation in a note to the financial statements
b. Argo received notice that it is being sued. Argo is advised by its attorneys that the lawsuit is considered frivolous. Do not Disclose
c. Argo is currently the defendant in a lawsuit. Argo believes it is probable that it will lose the lawsuit. Estimated damages to be paid will be between $70,000 - $100,000. Argo’s attorneys believe the judge will award the plaintiff approximately $90,000. Record an expense and a liability based on estimated amount
d. Argo recently filed a lawsuit against the manufacturer of a brake pedal used in a popular motorcycle sold by Argo, which had to be recalled due to a defective braking system. Argo is seeking damages of $1,500,000. Argo feels confident that it will be awarded the full amount of damages it is seeking. Describe the situation in a note to the financial statements
Contigient Assets. This potential asset will generally be disclosed in its financial statement, but not recorded as an asset until the lawsuit is settled.

ekkarill92 answered 2 years ago
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