Chapter 13, Problem 13.21E

Explain this problem in words and step by step.

AXE Co. is the defendant in a lawsuit. AXE reasonably estimates that this pending lawsuit will result in damages of $99,000. It is probably that AXE will lose the case. What should AXE do? Group of answer choices a. Record a liability b. Disclose in notes c. Have no disclosure

Caplan Pharma, Inc., recently was sued by a competitor for possible infringement of the competitor’s patent on a top-selling flu vaccine. The plaintiff is suing for damages of $15 million. Caplan's CFO has discussed the case with legal counsel, who believes it is possible that Caplan will not be able to successfully defend the lawsuit. The CFO knows that current U.S. accounting guidelines require that come gencies (such as lawsuits) must be disclosed in the annual report when a loss is possible. However, she is unsure whether this rule must be applied in the preparation of interim financial statements. She also knows that disclosure is necessary only if the amount is material, but she is unsure whether materiality should be assessed in relation to results for the interim period or for the entire year. Required Search current U.S. accounting standards to determine whether contingencies are required to be disclosed in interim reports, and, if so, how materiality is to be determined.…

Huprey Company is the defendant in the following legal claims. For each of the following separate claims, indicate whether Huprey should (a) record a liability, (b) disclose in notes, or (c) have no disclosure. 1. Huprey is very likely to lose a pending lawsuit. It reasonably estimates that damages paid will be $1,070,000. 2. It is reasonably possible that Huprey will lose a pending lawsuit. Huprey and its lawyers cannot estimate what the damages will be if it loses. 3. There is a remote (unlikely) chance Huprey will lose a pending lawsuit. The plaintiff is suing Huprey for $5,000,000. 4 4

SME A is a defendant in a breach of patent lawsuit. If the court rules in favor of the claimant, the lawyers believe that there is a 60 percent chance that the entity will be required to pay damages of P2 million (them amount sought by the claimant) and a 40 per cent chance that the entity will be required to pay damages of P1 million (the amount that was recently awarded by the same judge in a similar case). Other amounts of damages are unlikely.  The court is expected to rule the following year (in late December 2023). There is no indication that the claimant will settle out of court. SME A's lawyers believe there is a probability of very slightly over 50% that SME A will successfully defend the case. A 7 percent risk adjustment factor to the cash flows is considered appropriate to reflect the uncertainties in the cash flow estimates. An appropriate discount rate is 10 percent per year.What amount of provision must be recorded from the lawsuit as of December 31, 2022?

A newspaper accuses a public figure of being a mafia even though they know this is not true. The public figure sues and both set of lawyers agree it is likely that the public figure will win the case and receive damages in the order of $1million. There is no possibility of the case being resolved before the financial statements are finalized.  Required: Discuss how the litigation will be represented in the financial statements of both entities; the newspaper and the public figure.

ABC is a defendant in a breach of patent lawsuit. If the court rules in favor of the claimant, the lawyers believe that there is a 60 percent chance that the entity will be required to pay damages of P2 million (them amount sought by the claimant) and a 40 per cent chance that the entity will be required to pay damages of P1 million (the amount that was recently awarded by the same judge in a similar case). Other amounts of damages are unlikely.  The court is expected to rule the following year (in late December 2023). There is no indication that the claimant will settle out of court. ABC's lawyers believe there is a probability of very slightly over 50% that ABC will successfully defend the case. A 7 percent risk adjustment factor to the cash flows is considered appropriate to reflect the uncertainties in the cash flow estimates. An appropriate discount rate is 10 percent per year.What amount of provision must be recorded from the lawsuit as of December 31, 2022?

Candel is being sued by a customer for $2 million for breach of contract over a cancelled order. Candel has obtained legal opinion that there is a 20% chance that Candel will lose the case. Accordingly Candel has provided $400,000 ($2 million × 20%) in respect of the claim. The unrecoverable legal costs of defending the action are estimated at $100,000. These have not been provided for as the case will not go to court until next year. What is the amount of the provision that should be made by Candel in accordance with IAS 37 Provisions, contingent liabilities and contingent assets ?

In 2021, a lawsuit was filed against Keri Keri Co. for patent infringement. The plaintiff is claiming ₱400M in damages. Keri Keri’s legal counsel believes that it is probable that Keri Keri will lose the lawsuit and pay damages of not less than ₱40M but not more than ₱400M. The probability of any amount within the range is as likely as any other amount also within the range. The plaintiff has offered to settle the lawsuit out of court for ₱360M but Keri Keri did not agree to the settlement.How much is provision to be reported in Keri Keri’s year-end financial statements? a. P360,000,000 b. P220,000,000 c. P400,000,000 d. P40,000,000