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Alexandra [31]
2 years ago
9

The Commonwealth of Virginia filed suit in October 2014, against Northern Timber Corporation seeking civil penalties and injunct

ive relief for violations of environmental laws regulating forest conservation. When the financial statements were issued in 2015, Northern had not reached a settlement with state authorities, but legal counsel advised Northern Timber that it was probable the ultimate settlement would be $1,000,000 in penalties. The following entry was recorded: Loss—litigation ................................................................................................... 1,000,000 Liability—litigation ........................................................................................... 1,000,000 Late in 2016, a settlement was reached with state authorities to pay a total of $600,000 to cover the cost of violations. Required: 1. Prepare any journal entries related to the change. 2. Briefly describe other steps Northern should take to report the change.
Business
1 answer:
tatyana61 [14]2 years ago
4 0

Answer:

Northern Timber Corporation

1. Journal entries to record the change:

Debit Litigation Liability $1,000,000

Credit Cash $600,000

Credit Litigation Loss $400,000

To record the payment of the litigation liability and the reduction of litigation loss by $400,000.

2. Northern can restate the 2014 and 2015 Retained Earnings to reflect the change in the litigation loss.

Explanation:

a) Data and Calculations:

Records of probable loss from ultimate settlement:

2014:

Loss—litigation  1,000,000

Liability—litigation 1,000,000

2016:

Agreed settlement = $600,000

Analysis of Entries:

Litigation Liability $1,000,000

Cash $600,000

Litigation Loss $400,000

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The market price of a security is $50. Its expected rate of return is 14%. The risk-free rate is 6% and the market risk premium
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Answer:

The market price of the security is $31.81

Explanation:

In order to calculate the market price of the security if its correlation coefficient with the market portfolio doubles we would have to calculate first the following:

First, calculate the dividend expected after one year with the following formula:

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Next, we would have to calculate the beta of the security using the CAAPM Equation:

βi= E(ri)-rf/E(rm)-rf

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Next, we have to calculate the new beta due to the change in the correlation coefficient with the following formula:

β=correlation coefficient/σm*σs

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Next, Calculate the new expected return as follows:

E(ri)=rf+βi(E(rm)-rf)

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=0.22

Finally we calculate the new piece of the security as follows:

P=D/E(ri)

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The market price of the security is $31.81

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