Question

In: Accounting

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 1 year ago
Next > < Previous

Related Solutions

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...
What are three examples of estimates that are used in accounting that are not contingencies? Can...
What are three examples of estimates that are used in accounting that are not contingencies? Can you explain why they are not considered contingencies?
(Warranties and Loss Contingencies) The following two independent situations involve loss contingencies. Part 1: Benson Company...
(Warranties and Loss Contingencies) The following two independent situations involve loss contingencies. Part 1: Benson Company sells two products, Grey and Yellow. Each carries a 1-year warranty. 1.Product Grey—Product warranty costs, based on past experience, will normally be 1% of sales. 2.Product Yellow—Product warranty costs cannot be reasonably estimated because this is a new product line. However, the chief engineer believes that product warranty costs are likely to be incurred How should Benson report the estimated product warranty costs for...
Dimanche Company had the following estimates available at the beginning of the year: Indirect Cost Pool...
Dimanche Company had the following estimates available at the beginning of the year: Indirect Cost Pool #1 $60,000 Indirect Cost Pool #2 $180,000 Labor hours 40,000 Machine hours 80,000 Dimanche uses labor hours to allocate costs from Cost Pool #1, and machine hours to allocate costs from Cost Pool #2. The following jobs were started during the year: Job A1 Prime costs             $20,000 Labor hours                 5,000 Machine hours         12,000 Job A2 Prime costs            $32,000 Labor hours                8,000 Machine hours        20,000...
A manufacturing company is considering purchasing a 10 HP electric motor which it estimates will run...
A manufacturing company is considering purchasing a 10 HP electric motor which it estimates will run an average of 6 hours per day for 250 days per year. Past experience indicates that: (1) its annual cost for taxes and insurance averages 2.5% of first cost, (2) it must make 10% on invested capital before income tax considerations, and (3) it must recover capital invested in machinery within 5 years. Two motors are offered to the company. Motor A costs $...
Softlux Inc. is a carpet manufacturer. For June 2020, the company had the following standards for...
Softlux Inc. is a carpet manufacturer. For June 2020, the company had the following standards for one of its product lines: decorative mats. Units produced 2,000 Direct materials per mat (in kilograms) 3 Cost per kilograms of direct materials $22.50 Standard direct manufacturing labour cost (per hour) $20.00 Standard manufacturing labour time (hours per mat) 2 The following data were compiled regarding actual performance: Direct materials used (in kilograms) 6,400 Direct materials purchased (in kilograms) 6,500 Cost per kilogram of...
The DiForio Motor Car Company is a small manufacturer of automobiles and sells to three distributors...
The DiForio Motor Car Company is a small manufacturer of automobiles and sells to three distributors in the city of Peoria. The largest distributor, Hugh’s Auras, tells DiForio that it is losing money on its dealership and will quit selling the cars unless DiForio agrees to give it an exclusive contract. DiForio tells the other distributors, whose contracts were renewed from year to year, that it will no longer sell them cars at the end of the contract year. Smith...
The Toyota Motor Company is a global automobile manufacturer that operates on five different continents. In...
The Toyota Motor Company is a global automobile manufacturer that operates on five different continents. In the United States, it runs five major assembly plants. To manage its operations efficiently and effectively around the globe, Toyota uses several types of information systems. It uses the Internet and global networks to communicate with its offices, plants, and dealerships around the globe. Toyota is one of the founders of the Toyota Production System, an early version of the Just In Time (JIT)...
The following items represent various material contingencies of Luge Co. at December 31, Year 5, and...
The following items represent various material contingencies of Luge Co. at December 31, Year 5, and events subsequent to December 31, Year 5, but prior to the issuance of the Year 5 financial statements. For each item, select from the option list provided the correct reporting requirement. Each choice may be used once, more than once, or not at all. a) Disclosure Only b) Accrual and Disclosure c) Neither accrual nor disclosure d) Accrual of the minimum amount of range...
Financial Auditing Please list and discuss the following concerning contingencies: 1. How are contingencies handled by...
Financial Auditing Please list and discuss the following concerning contingencies: 1. How are contingencies handled by GAAP? 2. How do auditors obtain sufficient appropriate audit evidence concerning contingencies? 3. What should the auditor do if the client doesn't follow GAAP concerning contingencies? 4. What should the auditor do if the auditor can't obtain sufficient appropriate audit evidence? 5. What should the auditor do if the auditor can not estimate a contingency and the probability of it occurring is probable?
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT