12(b) study

Question 1

A lawsuit has been filed against Ivanhoe Company for wrongful termination. Ivanhoe’s legal councel had encouraged the company to settle because it is likely they will lose the case. The amount of estimated loss is between $575,000 and $1,017,000. Legal counsel believes that the case could be settled for $828,000. Ivanhoe should report:

Answer 1

a contingent liability for $828,000

Question 2

a large anticipated insurance recovery should be reported as

Answer 2

a disclosure only

Question 3

Carla Vista Inc. is being sued by former employees. Carla Vista’s lawyers believe the cost could be from $100,309,000 to $200,366,000. However, the lawyer states the most probable cost is $127,517,000. Carla Vista should accrue

Answer 3

a loss contigency of $127,517,000 and disclose an additional contigency of up to $728,849,000

Question 4

PHW - mark

Cullumber Company offers a cash rebate of $2 on each package sold during 2024. Historically, 20% of their customers mail in the rebates. During 2024, 3,046,000 packages sold, and 265,000 of the $2 rebates were mailed to customers. What is the rebate expense and liability, respectively?

Answer 4

$1,218,400; $688,400

Expense:
3,046,000 x 0.2 x 2 = 1,218,400

Liability:
1,218,400 - (265,000 x 2) = $688,400

Question 5

Sherid Company offers a cash rebate of $0.3 on each package sold during 2024. Historically, 10% of customers mail in the rebate form. During 2024, 5,168,000 sold, and 171,000 were redeemed. What is the rebate expense and liability, respectively?

Answer 5

$160,208; 107,198

Expense:
5,168,000 x 0.1 x 0.31 = 160,208

Liability:
160,208 - (171,000 x 0.3) = 107,198

Question 6

It is acceptable to offset current liabilities against assets that are to be applied to their liquidation.

true/false

Answer 6

false

present current liabilities in order of mature or amount.

Question 7

Cost of estimated claims oustanding

PHW question 5

Answer 7

(est. future redemptions / number of coupond/codes to send back) x (total cost - value of all coupons)

est future redemptions = (total sold x est %) - redeemed

debit premium expense; credit premium liability

Question 8

Management of Ogle estimates a recall could cost the company $1,800,000. Lawyers predict between $2,000,000 and $5,000,000 (filed in the next year). How should Ogle report the recall and potential suit in current year financial statements?

Answer 8

accrue $1,800,000 for the recall and a liability of $2,000,000 accrued for the suit.

Question 9

A customer sued a company for $1,000,000. The company’s legal defense team believes it could result unfavorable and cost $150,000 to $300,000. The company should:

Answer 9

Not accrue a contigent liability or disclose in notes

“immaterial”

Question 10

A contingent liability is accrued if…

Answer 10

loss is probable and amount can be reasonable estimated

if no amount is more likely than the other, go with the lowest

Question 11

Est. 30% of gift card will not be redeemed. In 20X, the company sells $4,000 in gift cards, and 20% are redeemed. The december 20X2 will include entry:

Answer 11

credit to breakage revenue of $343

debit unearned gift card revenue, credit gift card revenue

gift card revenue: 4,000 x 0.2 = 800
breakage:
4,000 x 0.3 = 1,200
4,000 - 1,200 = 2,800
1,200 x (1,200 / 2,800) = 343
unearned revenue decrease: 800 + 343 = 1,143