Contingencies: Greenlaw Inc., a publishing company, is preparing its December 31,2016, financial statements and must determine the proper accounting treatments for each of the following situations:
1. Greenlaw sells subscriptions to several magazines for a 1,2, or 3-year period. Cash reciepts from subscribers are credited to Unearned Revenue: Magazine Subscriptions, and this account had a balance of $2,500,000 at December 31,2016, expire as follows:
During 2017-$600,000
During 2018-$900,000
During 2019-$400,000
2. On January 4,2016, Greenlaw discounted collision, fire, and theft coverage on its delivery vehicles and became self-insured for these risks. Actual losses of $45,000 during 2016 were charged to delivery expense. The 2015 premium for the discontinued coverage amounted to $100,000, and the controller wants to set up a reserve for self-insurance by a debit to Delivery Expense of $55,000 and a credit to Reserve for Self-Insurance of $55,000.
3. A suit for breach of contract seeking damages of $1,000,000 was filed by an author against Greenlaw on July 3, 2016. The company's legal counsel believes that an unfavorable outcome is probable. A reasonable estimate of the court's award to the plaintiff is in the range between $100,000 and $500,000. No amount within this range is a better estimate of potential damages than any other amount.
4. During December 2016 a competitor company filed suit against Greenlaw for industrial espionage claiming $2,000,000 in damages. In the opinion of management and company counsel, it is reasonably possible that damages will be awarded to the plaintiff, and the amount of potential damages awarded to the plaintiff is estimated to be $1,500,000.
Required:
1. For each of the preceding situations, prepare the journal entry that should be recorded as of December 31, 2016, or explain whay an entry should not be recorded. Show supporting computations in good form.
2. How might your answers to the breach of contract litigation and the industrial espionage litigation change if Greenlaw used IFRS?