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Required: For each of the situations, decide whether the contingent liability should be accrued, disclosed, or ignored for financial statement purposes. Explain your reasoning. Provide the journal entry for any liabilities that need to be accrued.

Required: For each of the situations, decide whether the contingent liability should be accrued, disclosed, or ignored for financial statement purposes. Explain your reasoning. Provide the journal entry for any liabilities that need to be accrued.

FINANCIAL ACCOUNTING
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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3. The Ibri Company has three matters that may need to be disclosed or reported as of the end of their fiscal year: a. Ibri has been sued for damages by a customer who was injured while using one of the company's products. Legal counsel has concluded that it is probable that the customer will win the suit. Cases of this type have previously resulted in damages between $100,000 and $300,000. The case is expected to be resolved by the end of the first quarter of the next year. b. One of Ibri's storage facilities was destroyed in a flood in December. Both the insurance policy and the building itself had been poorly maintained for several years, with the result that fair value and carrying value for the facility are both approximately $125,000, the insurance policy limit is only $70,000. Inventory was covered by a separate insurance policy; Ibri has already been reimbursed for the lost inventory at an amount approximating fair value. The insurance claim should be resolved in a few weeks after year-end. c. Ibri is guarantor on a loan for one of its major suppliers that has recently declared bankruptcy. The supplier expects to emerge from bankruptcy after a reorganization and be able at that point to meet its obligations. Legal counsel determined that it is reasonably possible Ibri will be required to repay the loan, despite what the supplier has represented. Required: For each of the situations, decide whether the contingent liability should be accrued, disclosed, or ignored for financial statement purposes. Explain your reasoning. Provide the journal entry for any liabilities that need to be accrued.
Transcribed Image Text:3. The Ibri Company has three matters that may need to be disclosed or reported as of the end of their fiscal year: a. Ibri has been sued for damages by a customer who was injured while using one of the company's products. Legal counsel has concluded that it is probable that the customer will win the suit. Cases of this type have previously resulted in damages between $100,000 and $300,000. The case is expected to be resolved by the end of the first quarter of the next year. b. One of Ibri's storage facilities was destroyed in a flood in December. Both the insurance policy and the building itself had been poorly maintained for several years, with the result that fair value and carrying value for the facility are both approximately $125,000, the insurance policy limit is only $70,000. Inventory was covered by a separate insurance policy; Ibri has already been reimbursed for the lost inventory at an amount approximating fair value. The insurance claim should be resolved in a few weeks after year-end. c. Ibri is guarantor on a loan for one of its major suppliers that has recently declared bankruptcy. The supplier expects to emerge from bankruptcy after a reorganization and be able at that point to meet its obligations. Legal counsel determined that it is reasonably possible Ibri will be required to repay the loan, despite what the supplier has represented. Required: For each of the situations, decide whether the contingent liability should be accrued, disclosed, or ignored for financial statement purposes. Explain your reasoning. Provide the journal entry for any liabilities that need to be accrued.
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