Eastern Manufacturing is involved with several situations that possibly involve contingencies

P 13-6 Various contingencies

Eastern Manufacturing is involved with several situations that possibly involve contingencies. Each is described below. Eastern’s fiscal year ends December 31, and the 2011 financial statements are issued on March 15, 2012.

a. Eastern is involved in a lawsuit resulting from a dispute with a supplier. On February 3, 2012, judgment was rendered against Eastern in the amount of $107 million plus interest, a total of $122 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.

b. In November 2010, 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, 2012, Eastern reached a settlement with state authorities. Based upon discussions with legal counsel, the Company feels it is probable that $140 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.

c. Eastern is the plaintiff in a $200 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 $100 million.

d. At March 15, 2012, the Environmental Protection Agency is in the process of investigating possible soil contamination at various locations of several companies including Eastern. The EPA has not yet proposed a penalty assessment. Management feels an assessment is reasonably possible, and if an assessment is made an unfavorable settlement of up to $33 million is reasonably possible.

Required:
1. Determine the appropriate means of reporting each situation. Explain your reasoning.
2. Prepare any necessary journal entries and disclosure notes.

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LasikLook is involved in producing and selling high-end golf equipment

ACC 560 Week 5 Assignment

E8-2 LasikLook is involved in producing and selling high-end golf equipment. The company has recently been involved in developing various types of laser guns to measure yardages on the golf course. One small laser gun, called LittleLasik, appears to have a very large potential market. Because of competition, LasikLook does not believe that it can charge more than $90 for LittleLasik. At this price, LasikLook believes it can sell 100,000 of these laser guns. LittleLasik will cost $8,500,000 to manufacture, and the company wants an ROI of 20%.

Determine the target cost for one LittleLasik.

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LaGreca Company is involved in four separate industries

LaGreca Company is involved in four separate industries. The following information is available for each of the four industries.

Operating Segment Total Revenue Operating Profit (Loss) Identifiable Assets
W $ 60,000 $15,000 $167,000
X 10,000 1,500 83,000
Y 23,000 (2,000) 21,000
Z 9,000 1,000 19,000
$102,000 $15,500 $290,000

Instructions
Determine which of the operating segments are reportable based on the:
(a) Revenue test.
(b) Operating profit (loss) test.
(c) Identifiable assets test.

Indicate in the table below whether the segment is reportable or not, based on either revenue, profit or identifiable assets.


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Lincoln Chemicals became involved in investigations by the U.S. Environmental Protection Agency in regard to damages connected to waste disposal sites

P 13-9 Subsequent events

Lincoln Chemicals became involved in investigations by the U.S. Environmental Protection Agency in regard to damages connected to waste disposal sites. Below are four possibilities regarding the timing of (A) the alleged damage caused by Lincoln, (B) an investigation by the EPA, (C) the EPA assessment of penalties, and (D) ultimate settlement. In each case, assume that Lincoln is unaware of any problem until an investigation is begun. Also assume that once the EPA investigation begins, it is probable that a damage assessment will ensue and that once an assessment is made by the EPA, it is reasonably possible that a determinable amount will be paid by Lincoln.

Required:
For each case, decide whether (a) a loss should be accrued in the financial statements with an explanatory note, (b) a disclosure note only should be provided, or (c) no disclosure is necessary.


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Lancers Inc. is involved in five separate industries

Lancers Inc. is involved in five separate industries. The following information is available for each of the five industry segments.

Operating Segment Total Revenue Operating Profit (Loss) Identifiable Assets
A $140,000 $25,000 $240,000
B 40,000 8,000 11,000
C 26,000 (5,000) 36,000
D 190,000 (2,000) 49,000
E 2,000 500 15,000
$398,000 $26,500 $361,000

Instructions
Determine which of the operating segments are reportable based on the:
(a) Revenue test.
(b) Operating profit (loss) test.
(c) Identifiable assets test.

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You have just started work for Warren Co. as part of the controller’s group involved in current financial reporting problems

(Issues Raised about Investment Securities) You have just started work for Warren Co. as part of the controller’s group involved in current financial reporting problems. Jane Henshaw, controller for Warren, is interested in your accounting background because the company has experienced a series of financial reporting surprises over the last few years. Recently, the controller has learned from the company’s auditors that there is authoritative literature that may apply to its investment in securities. She assumes that you are familiar with this pronouncement and asks how the following situations should be reported in the financial statements

Situation 1
Trading securities in the current assets section have a fair value that is $4,200 lower than cost.
Situation 2
A trading security whose fair value is currently less than cost is transferred to the available-for-sale category.
Situation 3
An available-for-sale security whose fair value is currently less than cost is classified as noncurrent but is to be reclassified as current.
Situation 4
A company’s portfolio of available-for-sale securities consists of the common stock of one company. At the end of the prior year, the fair value of the security was 50% of original cost, and this reduction in fair value was reported as an other than temporary impairment. However, at the end of the current year the fair value of the security had appreciated to twice the original cost.
Situation 5
The company has purchased some convertible debentures that it plans to hold for less than a year. The fair value of the convertible debentures is $7,700 below its cost.

Instructions
What is the effect upon carrying value and earnings for each of the situations above? Assume that these situations are unrelated.

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