Question 1 One of Pacific's construction workers informed management on January 5, 2009, through his lawyers, that he intended to sue the company for $1.1 million in connection with an accident he sustained on the job site on December 20, 2008. As of December 31, 2008, management had been unaware of the injury, but reached an agreement to settle the matter by paying the employee's medical bills of $64,000 on February 23, 2009. Pacific's financial statements were authorized for issue on March 3, 2009. Required: (1) Considering all the information given, determine whether the above situation is a "contingent liability" or "provision" at December 31, 2008. (2) Determine the appropriate accounting treatment of the above situation at December 31, 2008 and prepare the journal entries if necessary. (Please indicate if no journal entry is required. Explanation is not required for journal entries.) (3) How would you think the appropriate accounting treatment of the above situation at December 31, 2008 related to the legal claim for $1.1 million if the work-site injury had occurred on January 3, 2009 instead and prepare the journal entries if necessary? But if no journal entry is required, please provide the explanation briefly. (4) Explain why the situation described in the question is a "contingent liability" or "provision" at December 31, 2008. The explanations should also define and contrast the differences between "contingent liability" and "provision".
Question 1 One of Pacific's construction workers informed management on January 5, 2009, through his lawyers, that he intended to sue the company for $1.1 million in connection with an accident he sustained on the job site on December 20, 2008. As of December 31, 2008, management had been unaware of the injury, but reached an agreement to settle the matter by paying the employee's medical bills of $64,000 on February 23, 2009. Pacific's financial statements were authorized for issue on March 3, 2009. Required: (1) Considering all the information given, determine whether the above situation is a "contingent liability" or "provision" at December 31, 2008. (2) Determine the appropriate accounting treatment of the above situation at December 31, 2008 and prepare the journal entries if necessary. (Please indicate if no journal entry is required. Explanation is not required for journal entries.) (3) How would you think the appropriate accounting treatment of the above situation at December 31, 2008 related to the legal claim for $1.1 million if the work-site injury had occurred on January 3, 2009 instead and prepare the journal entries if necessary? But if no journal entry is required, please provide the explanation briefly. (4) Explain why the situation described in the question is a "contingent liability" or "provision" at December 31, 2008. The explanations should also define and contrast the differences between "contingent liability" and "provision".
Chapter16: Accounting Periods And Methods
Section: Chapter Questions
Problem 40P
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Transcribed Image Text:Question 1
One of Pacific's construction workers informed management on January 5, 2009, through his
lawyers, that he intended to sue the company for $1.1 million in connection with an accident he
sustained on the job site on December 20, 2008. As of December 31, 2008, management had
been unaware of the injury, but reached an agreement to settle the matter by paying the
employee's medical bills of $64,000 on February 23, 2009. Pacific's financial statements were
authorized for issue on March 3, 2009.
Required:
(1) Considering all the information given, determine whether the above situation is a
"contingent liability" or "provision" at December 31, 2008.
(2) Determine the appropriate accounting treatment of the above situation at December 31,
2008 and prepare the journal entries if necessary. (Please indicate if no journal entry is
required. Explanation is not required for journal entries.)
(3) How would you think the appropriate accounting treatment of the above situation at
December 31, 2008 related to the legal claim for $1.1 million if the work-site injury had
occurred on January 3, 2009 instead and prepare the journal entries if necessary? But if no
journal entry is required, please provide the explanation briefly.
(4) Explain why the situation described in the question is a "contingent liability" or "provision"
at December 31, 2008. The explanations should also define and contrast the differences
between "contingent liability" and "provision".
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