Principles of Financial Accounting.
24th Edition
ISBN: 9781260158601
Author: Wild
Publisher: MCG
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Chapter 11, Problem 5MCQ
To determine
Find the suitable option for the given case.
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AXE Co. is the defendant in a lawsuit. AXE reasonably estimates that this pending lawsuit will result in damages of $99,000. It is probable that AXE will lose the case. What should AXE do? a. Record a liability c. Have no disclosure b. Disclose in notes
Swell Company has a lawsuit pending from a customer claiming damages of $100,000. Swell’s attorney advises that the likelihood the customer will win is remote. GAAP requires at a minimum that this contingent liability be
a. disclosed in the footnotes.
b. disclosed in the footnotes, with ranges of potential loss.
c. recorded as a journal entry, as well as disclosed in the footnotes.
d. No disclosure is required.
Huprey Company is the defendant in the following legal claims. For each of the following separate claims, indicate whether Huprey
should (a) record a liability, (b) disclose in notes, or (c) have no disclosure.
1. Huprey is very likely to lose a pending lawsuit. It reasonably estimates that damages paid will be $1,070,000.
2. It is reasonably possible that Huprey will lose a pending lawsuit. Huprey and its lawyers cannot estimate what the damages will be if it loses.
3. There is a remote (unlikely) chance Huprey will lose a pending lawsuit. The plaintiff is suing Huprey for $5,000,000.
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Chapter 11 Solutions
Principles of Financial Accounting.
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- Huprey Co. is the defendant in the following legal claims. For each of the following claims, indicatewhether Huprey should (a) record a liability, (b) disclose in notes, or (c) have no disclosure. Huprey can reasonably estimate that a pending lawsuit will result in damages of $1,250,000. It is probable that Huprey will lose the case.arrow_forwardSwell Company has a lawsuit pending from a customer claiming damages of $100,000. Swell’s attorney advises that the likelihood the customer will win is remote. GAAP requires at a minimum that this contingent liability be disclosed in the footnotes. disclosed in the footnotes, with ranges of the potential loss. recorded as a journal entry, as well as disclosed in the footnotes. No disclosure is required.arrow_forwardAxel Brick Company has a lawsuit pending from a customer claiming $100,000 in damages. Axel's attorney advises the likelihood the customer will win the lawsuit is reasonably probable. GAAP requires at a minimum that this contingent liability be... A. Disclosed in a note to the financial statements B. Record as a liability on the balance sheet C. Record as an expense on the income statementarrow_forward
- Huprey Co. is the defendant in the following legal claims. For each of the following claims, indicatewhether Huprey should (a) record a liability, (b) disclose in notes, or (c) have no disclosure. It is reasonably possible that Huprey will lose a pending lawsuit. The loss cannot be estimated.arrow_forwardMachine Corp. has several pending lawsuits against its company. Review each situation: A. A pending lawsuit, claiming $120,000 in damages, is considered likely to favor the plaintiff and can be reasonably estimated. B. Machine Corp. believes there might be other potential lawsuits about this faulty machinery, but this is unlikely to occur. C. A claimant sues Machine Corp. for damages, from a dishonored service contract agreement; the plaintiff will likely win the case but damages cannot be reasonably estimated. D. Machine Corp. believes a customer will win a lawsuit it filed, but the outcome is not likely and is not remote. It is possible the customer will win. 1 and 2. Which of the above situations require recognition in the financial statements and which require note disclosure only? a. A must be recognized and requires note disclosure; C and D require note disclosure only. b. All four cases require note disclosure only. c. A, C, and D must be recognized; B requires note…arrow_forwardMachine Corp. has several pending lawsuits against its company. Review each situation: A. A pending lawsuit, claiming $117,000 in damages, is considered likely to favor the plaintiff and can be reasonably estimated. B. Machine Corp. believes there might be other potential lawsuits about this faulty machinery, but this is unlikely to occur. C. A claimant sues Machine Corp. for damages, from a dishonored service contract agreement; the plaintiff will likely win the case but damages cannot be reasonably estimated. D. Machine Corp. believes a customer will win a lawsuit it filed, but the outcome is not likely and is not remote. It is possible the customer will win. 1 and 2. Which of the above situations require recognition in the financial statements and which require note disclosure only? a. A must be recognized and requires note disclosure; C and D require note disclosure only. b. All four cases require note disclosure only. c. A, C, and D must be recognized; B requires note…arrow_forward
- A lawsuit has been filed against Sunland Company for wrongful termination. Sunland's legal counsel had encouraged the company to settle because it is likely they will lose the case. The amount of the loss is estimated to be between $573000 and $1062000. Legal counsel believes that the case could be settled for $864000. Sunland should report O a contingent liability for $864000. O an estimated liability for $573000. O a contingent loss of $1062000. O no loss or liability until the case is settled. Attempts: 0 of 1 used Submit Answerarrow_forwardDwane Johnson owes Verizon Wireless $1100. Johnson offers Verizon $500 in lieu of the original $1000 debt and Verizon accepts. Settling a claim by the debtor offering to pay less than the creditor claims to be owed is an example of A. Fraudulent Misrepresentation B. an accord and satisfaction. C.promissory estoppel. D. a release. Give correct answer with proper explanationsarrow_forwardWe discussed contingent liabilities in class. Describe the conditions for when a contingent liability must be recorded through a journal entry, when it should be disclosed in the footnotes and when neither a journal entry nor disclosure is required? Assume that Mojito Corporation is sued by Dulcinea, Inc. for $1,000,000. Mojito’s attorneys believe that it is probable that the company will lose the suit and have to pay between $300,000 and $400,000 to Dulcinea. Based on your answer to a, what should Mojito do?arrow_forward
- Describe the conditions for when a contingent liability must be recorded through a journal entry, when it should be disclosed in the footnotes and when neither a journal entry nor disclosure is required? Assume that Mojito Corporation is sued by Dulcinea, Inc. for $1,000,000. Mojito’s attorneys believe that it is probable that the company will lose the suit and have to pay between $300,000 and $400,000 to Dulcinea. Based on your answer to a, what should Mojito do?arrow_forwardAxel Brick Company has a lawsuit pending from a customer claiming $100,000 in damages. Axel's attorney advises the likelihood the customer will win the lawsuit is reasonably probable. GAAP requires at a minimum that this contingent liability be...arrow_forwardMachine Corp. has several pending lawsuits against its company. Review each situation and (1) determine the treatment for each situation as probable and estimable, probable and inestimable, reasonably possible, or remote; (2) determine what, if any, recognition or note disclosure is required; and (3) prepare any journal entries required to recognize a contingent liability. A. A pending lawsuit, claiming $100,000 in damages, is considered likely to favor the plaintiff and can be reasonably estimated. B. Machine Corp. believes there might be other potential lawsuits about this faulty machinery, but this is unlikely to occur. C. A claimant sues Machine Corp. for damages, from a dishonored service contract agreement; the plaintiff will likely win the case but damages cannot be reasonably estimated. D. Machine Corp. believes a customer will win a lawsuit it filed, but the outcome is not likely and is not remote. It is possible the customer will win.arrow_forward
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