Garth, Corporation and Waite Inc. are privately held entities with a September 30 fiscal year end. Garth Corporation and Waite Inc. (a competitor of Garth) have been engaged in long-standing litigation over trademark infringement matter. The following is a summary of specific events that have taken place related to this matter: In May, 2020, Garth filed a claim against Waite for trademark infringement. The case is scheduled to be heard by a judge in December 2021. For the year ended September 30th, 2021, attorneys for Waite advised that they strongly believed that Waite would not be successful in the case. The attorneys stated that this loss was probable and represented that the estimate of the settlement would be in the range of $5 million to $10 million. Garth’s attorneys have advised Garth Corporation that they also agree with Waite’s attorneys’ assessment of the likelihood of their success and the amount of the probable settlement. Based upon this advice from the attorneys Waite’s controller recorded the contingency in the amount of $10 million as of September 30, 2021 as follows: 9/30/21 Loss on Trademark Lawsuit 10,000,000 Lawsuit Payable 10,000,000 Accounting Issue # 2: For the fiscal year ending September 30th, 2021 financial statements what is the correct amount to record for the lawsuit by Garth Corporation, Inc.? Codification Reference: Your answer/interpretation of the guidance for how it applies to Garth, Corporation The correct amount of the contingency to be recorded as of September 30, 2021 is: $0 $5 million $7.5 million $10 million Unable to determine at this time based upon the available information.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Garth, Corporation and Waite Inc. are privately held entities with a September 30 fiscal year end. Garth Corporation and Waite Inc. (a competitor of Garth) have been engaged in long-standing litigation over trademark infringement matter. The following is a summary of specific events that have taken place related to this matter:

In May, 2020, Garth filed a claim against Waite for trademark infringement. The case is scheduled to be heard by a judge in December 2021.
For the year ended September 30th, 2021, attorneys for Waite advised that they strongly believed that Waite would not be successful in the case. The attorneys stated that this loss was probable and represented that the estimate of the settlement would be in the range of $5 million to $10 million. Garth’s attorneys have advised Garth Corporation that they also agree with Waite’s attorneys’ assessment of the likelihood of their success and the amount of the probable settlement. Based upon this advice from the attorneys Waite’s controller recorded the contingency in the amount of $10 million as of September 30, 2021 as follows:

9/30/21 Loss on Trademark Lawsuit 10,000,000

Lawsuit Payable 10,000,000

Accounting Issue # 2: For the fiscal year ending September 30^th, 2021 financial statements what is the correct amount to record for the lawsuit by Garth Corporation, Inc.?

Codification Reference:

Your answer/interpretation of the guidance for how it applies to Garth, Corporation

The correct amount of the contingency to be recorded as of September 30, 2021 is:

$0
$5 million
$7.5 million
$10 million
Unable to determine at this time based upon the available information.

Expert Solution

Step 1

Contingent liabilities are those liabilities whose coming into existence depends on some future happening that may or may not happen. The contingent liabilities are recorded as a footnote to the Balance Sheet. The most common contingent liabilities arise due to issue with the warranty and as claims for lawsuits. Contingent liabilities are categorized as remote, possible and probable with reference to the Generally Accepted Accounting Principles(GAAP).