Contingency Paper 2

1

On November 5, year 2, a Dunn Corp. truck was in an accident with an auto driven by Bell. Dunn received notice on January 12, year 3, of a lawsuit for $700,000 damages for personal injuries suffered by Bell. Dunn Corp.’s counsel believes it is probable that Bell will be awarded an estimated amount in the range between $200,000 and $450,000, and that $300,000 is a better estimate of potential liability than any other amount. Dunn’s accounting year ends on December 31, and the year 2 financial statements were issued on March 2, year 3. What amount of loss should Dunn accrue at December 31, year 2?






2

During year 2, Haft Co. became involved in a tax dispute with the IRS. At December 31, year 2, Haft’s tax advisor believed that an unfavorable outcome was probable. A reasonable estimate of additional taxes was $200,000 but could be as much as $300,000. After the year 2 financial statements were issued, Haft received and accepted an IRS settlement offer of $275,000. What amount of accrued liability should Haft have reported in its December 31, year 2 balance sheet?






3

Management can estimate the amount of loss that will occur if a foreign government expropriates some company assets. If expropriation is reasonably possible, a loss contingency should be






4

Invern, Inc. has a self-insurance plan. Each year, retained earnings is appropriated for contingencies in an amount equal to insurance premiums saved less recognized losses from lawsuits and other claims. As a result of a year 2 accident, Invern is a defendant in a lawsuit in which it will probably have to pay damages of $190,000. What are the effects of this lawsuit’s probable outcome on Invern’s year 2 financial statements?






5

In year 1, a personal injury lawsuit was brought against Halsey Co. Based on counsel’s estimate, Halsey reported a $50,000 liability in its December 31, year 1 balance sheet. In November year 2, Halsey received a favorable judgment, requiring the plaintiff to reimburse Halsey for expenses of $30,000. The plaintiff has appealed the decision, and Halsey’s counsel is unable to predict the outcome of the appeal. In its December 31, year 2 balance sheet, Halsey should report what amounts of asset and liability related to these legal actions?
Asset
Liability






6

During January year 2, Haze Corp. won a litigation award for $15,000 that was tripled to $45,000 to include punitive damages. The defendant, who is financially stable, has appealed only the $30,000 punitive damages. Haze was awarded $50,000 in an unrelated suit it filed, which is being appealed by the defendant. Counsel is unable to estimate the outcome of these appeals. In its year 2 financial statements, Haze should report what amount of pretax gain?






7

In May year 1 Caso Co. filed suit against Wayne, Inc. seeking $1,900,000 damages for patent infringement. A court verdict in November year 5 awarded Caso $1,500,000 in damages, but Wayne’s appeal is not expected to be decided before year 7. Caso’s counsel believes it is probable that Caso will be successful against Wayne for an estimated amount in the range between $800,000 and $1,100,000, with $1,000,000 considered the most likely amount. What amount should Caso record as income from the lawsuit in the year ended December 31, year 5?






8

During year 2, Smith Co. filed suit against West, Inc. seeking damages for patent infringement. At December 31, year 2, Smith’s legal counsel believed that it was probable that Smith would be successful against West for an estimated amount in the range of $75,000 to $150,000, with all amounts in the range considered equally likely. In March year 3, Smith was awarded $100,000 and received full payment thereof. In its year 2 financial statements, issued in February year 3, how should this award be reported?






9

In year 2, a contract dispute between Dollis Co. and Brooks Co. was submitted to binding arbitration. In year 2, each party’s attorney indicated privately that the probable award in Dollis’ favor could be reasonably estimated. In year 3, the arbitrator decided in favor of Dollis. When should Dollis and Brooks recognize their respective gain and loss?
Dollis’ gain
Brooks’ loss






10

Eagle Co. has cosigned the mortgage note on the home of its president, guaranteeing the indebtedness in the event that the president should default. Eagle considers the likelihood of default to be remote. How should the guarantee be treated in Eagle’s financial statements?






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