Contingencies
Response to the following problem:
Greenlaw, Inc., a publishing company, is preparing its December 31, 2010 financial statements and must determine the proper accounting treatment for each of the following situations:
(1) Greenlaw sells subscriptions to several magazines for a one-year, two-year, or three-year period. Cash receipts from subscribers are credited to magazine subscriptions collected in advance, and this account had a balance of $2,500,000 at December 31, 2010. Outstanding subscriptions at December 31, 2010 expire as follows:
During 2011 - $600,000
During 2012 - 900,000
During 2013 - 400,000
(2) On January 4, 2010 Greenlaw discontinued collision, fire, and theft coverage on its delivery vehicles and became selfinsured for these risks. Actual losses of $45,000 during 2010 were charged to delivery expense. The 2009 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 the 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, 2010. 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 2010 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, 2010, or explain why 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?