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
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 # 1: For the fiscal year ending September 30th, 2021, financial statements what is the correct amount to record for the lawsuit by Waite, Inc.?
- Codification Reference:
- Your answer/interpretation of the guidance for how it applies to Waite?
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.
The question is related to Contingent liability. A contingent liability is:
(a) a potential obligation arising from previous events that will be confirmed only by the occurrence or non occurrence of one or more events unknown future occurrences that are beyond the company' control; or
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