The following are three independent situations where the reporting entity for which financial statements are being prepared are underlined. Every company has a December 31, 2012 year end.
For each situation, describe what the appropriate accounting treatment is. You must state whether an amount should be accrued or not, and whether a note disclosure is required or not, by the reporting entity. It is not necessary to prepare the journal entry or actual note disclosure, if any. Be sure to justify your answer with the case facts.
Situation 1:The Supreme Court of Canada ordered a supplier to pay $1,000,000 to
7 Heaven Cookies Inc. for breach of contract in 2006. The court judgment was rendered on January 18, 2013; the release date of the financial statements is scheduled for February 17, 2013. Based on the latest financial statements filed in court prior to the judgment, assets held by the defendant exceed its liabilities by $5,000,000. The assets consist entirely of inventory.
Situation 2:Rich Networks Inc. is being sued by a competitor for infringing on one of its competitor's patents. The suit for $2,500,000 was filed in court on November 30, 2012. Legal counsel estimates the likelihood of success in damages being awarded to the competitor is 20%.
The company has not yet released its 2012 financial statements.
Situation 3:A lawsuit against Beef Products Inc. was launched on October 5, 2012 by the heirs of an individual who died from an E. Coli bacteria infection. The lawsuit is for an unspecified amount of damages; legal counsel estimates that the plaintiff will be 90% successful. Additionally, more than 20 people have died from the tainted beef products as of December 31, 2012. Management fears pending litigation is imminent but will defend itself vigorously against all charges. The company has not yet released its 2012 financial statements.