The following selected transactions relate to contingencies of Bowe-Whitney Inc.
ID: 2459149 • Letter: T
Question
The following selected transactions relate to contingencies of Bowe-Whitney Inc. Bowe-Whitney's fiscal year ends on December 31, 2013, and financial statements are published in March 2014.
1. Bowe-Whitney is involved in a lawsuit resulting from a dispute with a customer over a 2013 transaction. At December 31, attorneys advised that it was probable that Bowe-Whitney would lose $3 million in an unfavorable outcome. On February 12, 2014, judgment was rendered against Bowe-Whitney in the amount of $14 million plus interest, a total of $15.2 million. Bowe-Whitney does not plan to appeal the judgment.
2. Since August of 2013, Bowe-Whitney has been involved in labor disputes at two of its facilities. Negotiations between the company and the unions have not produced a settlement and, since January 2013, strikes have been ongoing at these facilities. It is virtually certain that material costs will be incurred but the amount of resultant costs cannot be adequately predicted.
3. Bowe-Whitney is the defendant in a lawsuit filed in January 2014 in which Access Company seeks $10 million as an adjustment to the purchase price related to the sale of Bowe-Whitney's hardwood division in 2013. The lawsuit alleges that Bowe-Whitney misrepresented the division's assets and liabilities. Legal counsel advises that it is reasonably possible that Bowe-Whitney could lose $5 million, but that it's extremely unlikely it could lose the $10 million asked for.
4. At March 1, 2014, the EPA is in the process of investigating the possibility of environmental violations at one of Bowe-Whitney's sites, but has not proposed a penalty assessment. Management feels an assessment is reasonably possible, and if an assessment is made, a settlement of up to $33 million is probable.
Required:
Prepare journal entries that should be recorded as a result of each of the above contingencies
Explanation / Answer
Answer
The following selected transactions relate to contingencies of Bowe-Whitney Inc. Bowe-Whitney's fiscal year ends on December 31, 2013, and financial statements are published in March 2014.
1. Bowe-Whitney is involved in a lawsuit resulting from a dispute with a customer over a 2013 transaction. At December 31, attorneys advised that it was probable that Bowe-Whitney would lose $3 million in an unfavorable outcome. On February 12, 2014, judgment was rendered against Bowe-Whitney in the amount of $14 million plus interest, a total of $15.2 million. Bowe-Whitney does not plan to appeal the judgment.
Answer
Journal Entry
Profit and loss Account Dr. $ 15.20 million
To Provision for customer claims A/c Cr. $ 14.00 million
To Provision for interest on customer claims A/c Cr. $ 1.20 million
2. Since August of 2013, Bowe-Whitney has been involved in labor disputes at two of its facilities. Negotiations between the company and the unions have not produced a settlement and, since January 2013, strikes have been ongoing at these facilities. It is virtually certain that material costs will be incurred but the amount of resultant costs cannot be adequately predicted.
Answer
No Journal Entry is to be made.
It is contingent liability. But It is material event so it should be disclosed at notes to the financial statements.
3. Bowe-Whitney is the defendant in a lawsuit filed in January 2014 in which Access Company seeks $10 million as an adjustment to the purchase price related to the sale of Bowe-Whitney's hardwood division in 2013. The lawsuit alleges that Bowe-Whitney misrepresented the division's assets and liabilities. Legal counsel advises that it is reasonably possible that Bowe-Whitney could lose $5 million, but that it's extremely unlikely it could lose the $10 million asked for.
Answer
Journal entry
Event has happened in 2013 and existed on balance sheet date. So it is adjustable event.
Profit and loss Account Dr. $ 5.00 million
To Provision for Access Company claims A/c Cr. $ 5.00 million
4. At March 1, 2014, the EPA is in the process of investigating the possibility of environmental violations at one of Bowe-Whitney's sites, but has not proposed a penalty assessment. Management feels an assessment is reasonably possible, and if an assessment is made, a settlement of up to $33 million is probable.
Answer
No Journal entry is to be passed.
It is possible obligation and contingent liability. But It is material event so it should be disclosed at notes to the financial statements with amount of $ 33 million.