Question

Eastern Manufacturing is involved with several situations that possibly involve contingencies. Each is described below. Eastern’s fiscal year ends December 31, and the 2021 financial statements are issued on March 15, 2022.

1. Eastern is involved in a lawsuit resulting from a dispute with a supplier. On February 3, 2022, judgment was rendered against Eastern in the amount of $123 million plus interest, a total of $138 million. Eastern plans to appeal the judgment and is unable to predict its outcome though it is not expected to have a material adverse effect on the company.
2. In November 2020, the State of Nevada filed suit against Eastern, seeking civil penalties and injunctive relief for violations of environmental laws regulating hazardous waste. On January 12, 2022, Eastern reached a settlement with state authorities. Based upon discussions with legal counsel, the Company feels it is probable that $156 million will be required to cover the cost of violations. Eastern believes that the ultimate settlement of this claim will not have a material adverse effect on the company.
3. Eastern is the plaintiff in a $216 million lawsuit filed against United Steel for damages due to lost profits from rejected contracts and for unpaid receivables. The case is in final appeal and legal counsel advises that it is probable that Eastern will prevail and be awarded $120 million.
4. At March 15, 2022, Eastern knows a competitor has threatened litigation due to patent infringement. The competitor has not yet filed a lawsuit. Management believes a lawsuit is reasonably possible, and if a lawsuit is filed, management believes damages of up to $49 million are reasonably possible.

   
Required:
1. Determine the appropriate way to report each situation.
2. Prepare the appropriate journal entries for these situations.

Answer 1

ANSWER:

AS PER GIVEN DATA :-

1.Determine the appropriate means of reporting each situation

2. Prepare the appropriate journal entries for the situations

EASTERN MANUFACTURING :-

Requirement a:

This represents a loss contingency. based on the information eastern is unable to predict. the outcome of the appear. In addition , the outcome is not accepted to have a material adverse effect on the company. Therefore, eastern would not record the $138 millions loss. It would however, provide a disclosure note.

Requirement b:

This is a loss contingency. Because it is probable that eastern will have to pay $156 million , which can be reasonably estimated, eastern should record the loss and related liability and provide footnote

2) disclosure that details the nature of the litigation and the loss

litigation loss a/c $ 156

to litigation liability $ 156

Requirement c: This is a gain contingency. Even though the gain is probable and can be reasonably estimated, gain contingencies are not accrued. Rather than would be recognised with realized. Even though the gain contingency, it should still be disclosed in a footnote

Requirement d: There would be no disclosure in this case because the EPA has not yet proposed a penalty assesment is not probable