In an audit of the Marco Corporation as of December 31, 2013,the following situations exist. No entries have been made in the accounting records inrelation to these items.1. During the year 2013, the Marco Corporation was named as a defendant in a suit fordamages by the Dalton Company for breach of contract. An adverse decision to theMarco Corporation was rendered and the Dalton Company was awarded $4,000,000damages. At the time of the audit, the case was under appeal to a higher court.2. On December 23, 2013, the Marco Corporation declared a common stock dividendof 1,000 shares with a par value of $1,000,000 of its common stock, payableFebruary 2, 2014, to the common stockholders of record December 30, 2013.3. The Marco Corporation has guaranteed the payment of interest on the 10-year, firstmortgage bonds of the Newart Company, an affiliate. Outstanding bonds of theNewart Company amount to $5,500,000 with interest payable at 5% per annum, dueJune 1 and December 1 of each year. The bonds were issued by the Newart Companyon December 1, 2011, and all interest payments have been met by that company withthe exception of the payment due December 1, 2013. The Marco Corporation statesthat it will pay the defaulted interest to the bondholders on January 15, 2014.a. Define contingent liability.b. Describe the audit procedures you would use to learn about each of the situations listed.c. Describe the nature of the adjusting entries or disclosure, if any, you would makefor each of these situations.*
In an audit of the Marco Corporation as of December 31, 2013,
the following situations exist. No entries have been made in the accounting records in
relation to these items.
1. During the year 2013, the Marco Corporation was named as a defendant in a suit for
damages by the Dalton Company for breach of contract. An adverse decision to the
Marco Corporation was rendered and the Dalton Company was awarded $4,000,000
damages. At the time of the audit, the case was under appeal to a higher court.
2. On December 23, 2013, the Marco Corporation declared a common stock dividend
of 1,000 shares with a par value of $1,000,000 of its common stock, payable
February 2, 2014, to the common stockholders of record December 30, 2013.
3. The Marco Corporation has guaranteed the payment of interest on the 10-year, first
mortgage bonds of the Newart Company, an affiliate. Outstanding bonds of the
Newart Company amount to $5,500,000 with interest payable at 5% per annum, due
June 1 and December 1 of each year. The bonds were issued by the Newart Company
on December 1, 2011, and all interest payments have been met by that company with
the exception of the payment due December 1, 2013. The Marco Corporation states
that it will pay the defaulted interest to the bondholders on January 15, 2014.
a. Define contingent liability.
b. Describe the
c. Describe the nature of the
for each of these situations.*
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