Question

The following selected transactions relate to contingencies of Bowe-Whitney Inc. Bowe-Whitney's fiscal year ends on December 31, 2021, and financial statements are published in March 2022.
1. Bowe-Whitney is involved in a lawsuit resulting from a dispute with a customer over a 2021 transaction. At December 31, attorneys advised that it was probable that Bowe-Whitney would lose $3 million in an unfavorable outcome. On February 12, 2022, 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 2021, 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 2021, 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 2022 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 2021. 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, 2022, 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

Answer 1

Answer:

Explanation:            Balance sheet as at December 31

Provision should be made

1. December 31  -   Dr   Legal fine  $3,000,000

                                                                           Cr  legal liability   $3,000,000

February 12   Dr Legal fine $12,200,000      

                                                                         Cr legal liability  $ 12,200,000

a)Payment of fine was probable ,It can be measured reliably and an outflow of economic benefit will occur

b) An adjusting entry is required as it evident on a case that was already existing as at the year end.

2)A disclosure should be made in the financial statement .Even though it is material , but the effect can not be reasonably estimated . (Contingent liability )

3) A disclosure should be made in the financial statement stating the $5 million likely fine as the outcome is just reasonable but not probable , even though was estimated (contingent liability)

4) The assessment is only reasonable but not probable , it should be disclosed in financial the financial statements