The following selected transactions relate to provisions orcontingencies of Classical Tool Makers, Inc., which beganoperations in July 2009. Classical's fiscal year ends on December31. Financial statements are published in April 2010.
Required:
Prepare the appropriate journal entries to record any amounts thatshould be recorded and indicate whether a disclosure note isnecessary.
1. In December 2009, the state of Tennessee filed suit against Classical, seeking penalties for violations of clean air laws. OnJanuary 23, 2010, Classical reached a settlement with stateauthorities to pay $1.5 million in penalties.
2. Classical is the plaintiff in a $4 million lawsuit filed againsta supplier. The suit is in final appeal and attorneys advise thatit is virtually certain that Classical will win the case and beawarded $2.5 million.
3. In November 2009, Classical became aware of a design flaw in anindustrial saw that poses a potential electrical hazard. A productrecall appears unavoidable. Such an action would likely cost thecompany $500,000.
4. On November 1, 2009, Classical borrowed $16 million through theissuance of a 9-month, 12% note payable. Interest was payable atmaturity.