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Chapter 13: Q10BE (page 692)

BE13-10 (L03) Scorcese Inc. is involved in a lawsuit at December 31, 2017. (a) Prepare the December 31 entry assuming it is probable that Scorcese will be liable for $900,000 as a result of this suit. (b) Prepare the December 31 entry, if any, assuming it is not probable that Scorcese will be liable for any payment as a result of this suit.

Short Answer

Expert verified

Answer:

To record thelawsuit, it requires debiting the lawsuit loss account and crediting the lawsuit liability for the same amount of $900,000.

Step by step solution

01

Meaningof Contingent Liability

The term contingent liability refers to the amount of liability that may or may not become payable in the future. It may or may not become an actual liability. It depends on future events.

02

Journal entries

Transactions

General Journal

Debit

Credit

(a)

Lawsuit Loss

$900,000

Lawsuit Liability

$900,000

(b)

No entry required

-----------

------------

Note:

For the second transaction, there is no entry required the loss is not accrued because it is not probable that a liability has been incurred on December 31, 2021.

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Most popular questions from this chapter

(Refinancing of Short-Term Debt) On December 31, 2017, Hattie McDaniel Company had \(1,200,000 of short-term debt in the form of notes payable due February 2, 2018. On January 21, 2018, the company issued 25,000 shares of its common stock for \)38 per share, receiving \(950,000 proceeds after brokerage fees and other costs of issuance. On February 2, 2018, the proceeds from the stock sale, supplemented by an additional \)250,000 cash, are used to liquidate the \(1,200,000 debt. The December 31, 2017, balance sheet is issued on February 23, 2018.

Instructions

Show how the \)1,200,000 of short-term debt should be presented on the December 31, 2017, balance sheet, including note disclosure

Question: (Free-Standing Derivative) Warren Co. purchased a put option on Echo common shares on January 7, 2017,

for \(360. The put option is for 400 shares, and the strike price is \)85 (which equals the price of an Echo share on the purchase

date). The option expires on July 31, 2017. The following data are available with respect to the put option.

Date Market Price of Echo Shares Time Value of Put Option

March 31, 2017 \(80 per share \)200

June 30, 2017, 82 per share 90

July 6, 2017, 77 per share 25

Instructions

Prepare the journal entries for Warren Co. for the following dates.

(a) January 7, 2017鈥擨nvestment in a put option on Echo shares.

(b) March 31, 2017鈥擶arren prepares financial statements.

(c) June 30, 2017鈥擶arren prepares financial statements.

(d) July 6, 2017鈥擶arren settles the put option on the Echo shares.

Komissarov Company has a debt investments in the bonds issued by Keune Inc. The bonds were purchased at par

for \(400,000 and, at the end of 2017, have a remaining life of 3 years with annual interest payments at 10%, paid at the end of each year. This debt investment is classified as held-for-collection. Keune is facing a tough economical environment and informs all of its investors that it will be unable to make all payments according to the contractul terms. The controller of Komissarov has prepared the following revised expected cash flow forecast for this bond investment.

December 31, Expected cash flows

2018 \)35,000

2019 35,000

2020 385,000

Total cash flows $455,000

Instructions

(a) Determine the impairement loss for Komissarov at December31, 2017.

(b) Prepare the entry to record the impairement loss for Komissarov at Decembber 31, 2017.

(c) On January 15, 2018, Keune receives a major capiatl infusion from a private equity investor. It informs Komissarov that the bonds now will be paid according to the contractual terms. Briefly describe how the Komissarov would account for the bond investment in light of this new information.

(a) Assuming no Fair Value Adjustment account balance at the beginning of the year, prepare the adjusting entry at the end of the year if Laura Company鈥檚 available-for-sale debt securities have a fair value of \(60,000 below cost.

(b) Assume the same information as part (a), except that Laura Company has a debit balance in its Fair Value Adjustment account of \)10,000 at the beginning of the year. Prepare the adjusting entry at year-end.

Why is the liabilities section of the balance sheet of primary significance to bankers?
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