Concept explainers
Surfing the Standards Case 2: Amounts Paid by Shareholders for an Entity’s Expenses
Moocher Company, a publicly traded company that has a December 31 year-end manufactures and sells novelty toys. Recently, one of the toys that Moocher produced and sold was found to cause serious digestive problems for dogs that ate the toy. Accordingly, Moocher was sued by a group of consumers in May of the current year. Moocher didn't believe that it would lose the suit in a court ruling, but it did not want the bad publicity. Because Moocher did not have extensive cash reserves, the primary shareholder (55% owner) of Moocher transferred 40,000 shares to the plaintiffs to settle the case in December of the current year. The market value of the shares was $25 per share at the time of the transfer.
Does Moocher Company need to report anything in its annual financial statements for the current year related to this transaction?
Use the U.S. authoritative literature to support your conclusions.
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Intermediate Accounting
- Identify the accounting assumption, accounting principle, or reporting constraint that most appropriately justifies these procedures and practices. Use only one item per description. Choices: a. Full disclosure principle b. Time period assumption c. Materiality constraint d. Cost principle e. Revenue recognition principle f. Conservatism constraint g. Matching principle h. Economic entity assumption i. Monetary unit j. Going concern k. some other answerarrow_forwardIdentify the accounting concept that was violated in each of the following situations.6. Ace Appliance Company is involved in a major lawsuit involving injuries sustained by some of its employeesin the manufacturing plant. The company is being sued for $2,000,000, a material amount, and is not insured.The suit was not disclosed in the most recent financial statements because no settlement had been reached.arrow_forwardFor each of the independent situations below indicate the appropriate accounting treatment and note disclosure. Question 4 options: A judge has found the company to be liable for an amount of $400,000 for copyright infringement. The company's lawyers feel that an appeal is unlikely to succeed. The company is being sued as a result of selling a product that made its customers sick. Legal counsel believes the lawsuit will be successful but is unable to estimate the amount of damages the company will have to pay. The company is being sued for patent infringement. Legal counsel believes that the claim is frivolous and that the likelihood of a successful lawsuit is remote. A customer fell on ice outside the company's store. Legal counsel feels that it is only thirty percent likely that a lawsuit will be successful. 1. Record a liability and disclose the situation in the notes. 2. Do not…arrow_forward
- Contingencies Fallon Company, a toy manufacturer that also operates several retail outlets, is preparing its December 31, 2019, financial statements. It has identified the following legal situations that may qualify as contingencies: A customer is suing the company for 800,000 in damages because her child was injured in November 2019 while riding an escalator that stopped suddenly in one of its stores. The child was hurt when he tripped and fell while walking down an escalator that was going up. Legal counsel feels that the child is partially at fault, but that it is probable that the lawsuit will be settled for between SO,000 and 100,000, with 80,000 being the most likely amount. Fallon has discovered that a skateboard it began manufacturing and selling in 2019 has defective bearings, sometimes causing a wheel to fall off. Fallon has issued a recall notice in newspapers and magazines in which it offers to replace the bearings. It estimates a cost of 200,000 for these repairs. No lawsuits have been filed for injury claims, although the company feels that there is a reasonable possibility that claims may total as high as 2 million. Fallon has an incinerator behind one of its retail outlets which is used to burn cardboard boxes received in shipments of inventory from suppliers. The state environmental protection agency filed suit against the company in August 2019 for air pollution. Fallon expects to stop using the incinerator and begin recycling. However, its lawyers believe that it is probable that a fine of between 40,000 and 60,000 will be levied against the company, although they cannot predict the exact amount. In early 2019, Fallon signed a contract with a computer vendor to install state of the art cash registers in all of its retail outlets. Because of the vendors inability to acquire sufficient cash registers, the vendor canceled the contract. Fallon has filed a breach of contract suit against the vendor, claiming 300,000 in damages. The companys lawyers expect that it will settle the suit out of court for 150,000. Required: Next Level For each situation, prepare the journal entry (if any) on December 31, 2019, to record the information for Fallon, and explain your reasoning. If no journal entry is recorded, explain how the information would be disclosed in Fallons 2019 annual report. How would your answers change if Fallon used IFRS?arrow_forwardOn July 24 of the current year, Sam Smith was involved in an accident with his business use automobile. Sam had purchased the car for 30,000. The automobile had a fair market value of 20,000 before the accident and 8,000 immediately after the accident. Sam has taken 20,000 of depreciation on the car. The car is insured for the fair market value of any loss. Because of Sams history, he is afraid that if he submits a claim, his policy will be canceled. Therefore, he is considering not filing a claim. Sam believes that the tax loss deduction will help mitigate the loss of the insurance reimbursement. Sams current marginal tax rate is 35%. Write a letter to Sam that contains your advice with respect to the tax and cash flow consequences of filing versus not filing a claim for the insurance reimbursement for the damage to his car. Also prepare a memo for the tax files. Sams address is 450 Colonels Way, Warrensburg, MO 64093.arrow_forwardWw.228.arrow_forward
- 1 In November 2019, Manly Ltd, a manufacturer of heating systems, was taken to court by one of its competitors, Heating Ltd, under the Competition and Consumer Act 2010(Cth). Heating alleged that Manly sought to enter into exclusive agreements with several retailers that they would only stock Manley’s products. While manly incurred $240000 in legal costs in defending the action, the case was settled out of court. The terms of the agreement on 20 February 2020 provided that Manly would pay Heating $$500,000 immediately, and an amount equal to 3% of profits over the next two years. For 2018/2019 the profit was estimated to be $660,000 and the year after $780,000. Advise Manly on the deductibility of this expenditure. Make sure you include the relevant sections of the legislationarrow_forwardConstant Company is being sued for P4, 000,000 for an injury caused to a child as a result of alleged negligence while the child was visiting the Constant Company plant in March 2018. The suit was filed in July 2018. Constant’s lawyer states that it is probable that Constant will lose the suit and be found liable for a judgement costing anywhere from P400, 000 to P2, 000,000. However the lawyer states that the most probable judgement is P1, 000,000. Instructions:How should Constant report the suit in its 2018 financial statements. Discuss the rationale for your answer. Include in your disclosures, if any, that should be made in Constant’s financial statementsarrow_forwardModern Footwear LLC received intimation of claim for OMR 20,000 as damages because some foot-wears were not delivered in time for an order. The Modern Footwear admits the delay but disputes the amount of the claim pointing out that alternative foot-wear cost no more than OMR. 15,000. How would you advise the Modern Footwear Company to treat the claim when finalising the financial statements for the year? a.Account for a liability of OMR. 15,000 b.Ignore the claim c.Account for a liability of OMR. 20,000 d.Account for the best estimate as liabilityarrow_forward
- (b) Grouper' major customer shocked the industry on January 14 by declaring bankruptcy. There had been no warning to ANBS of this customer's impending financial collapse, and Grouper had not accrued any Allowance for Expected Credit Losses specific to this customer. At the end of the fiscal year, the customer owed more than $130,000 to Grouper. Identify the effect that it will have on Grouper's 2023 net income. Ignore taxes. Net income will ✓ by $arrow_forwardIn 2019, five people died in a car accident, possibly due to the products sold by SH Limited. Legal proceedings are started seeking damages of $3 million from SH Limited. Up to the date of approval of financial statements for the year ended 31 December 2019, the lawyers of SH Limited advised that it is probable that it will not be found liable. However, when SH Limited prepares the financial statements for the year ended 31 December 2020, its lawyers advised that, owing to developments in the case, it is probable that it will be found liable. According to HKAS 37 Provisions, Contingent Liabilities and Contingent Assets, what accounting treatment for SH Limited is required: (a) at 31 December 2019 (b) at 31 December 2020arrow_forwardSovereign Foods suffered a $1,500,000 loss when the FDA prohibited the sale of food products containing red dye no. 3. On its other products, Sovereign Foods had sales of $6,580,000 and costs and other expenses of $6,505,000. Which of the following statements is true? (Ignore taxes) A. Sovereign Foods shows the $1,500,000 loss in a separate line of the income statement after income from continuing operations. B. Sovereign Foods reports a net loss of $1,425,000 for the current year. C. Sovereign Foods reports income from continuing operations of $75,000. D. Sovereign Foods combines the $1,500,000 loss with its other costs and expenses of $6,505,000, since this item does not qualify for any special disclosure.arrow_forward
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning