Problem 13-6 Various contingencies [LO13-5, 13-6]
Eastern Manufacturing is involved with several situations thatpossibly involve contingencies. Each is described below. Eastern’sfiscal year ends December 31, and the 2018 financial statements areissued on March 15, 2019.
- Eastern is involved in a lawsuit resulting from a dispute witha supplier. On February 3, 2019, judgment was rendered againstEastern in the amount of $107 million plus interest, a total of$122 million. Eastern plans to appeal the judgment and is unable topredict its outcome though it is not expected to have a materialadverse effect on the company.
- In November 2017, the State of Nevada filed suit againstEastern, seeking civil penalties and injunctive relief forviolations of environmental laws regulating hazardous waste. OnJanuary 12, 2019, Eastern reached a settlement with stateauthorities. Based upon discussions with legal counsel, the Companyfeels it is probable that $140 million will be required to coverthe cost of violations. Eastern believes that the ultimatesettlement of this claim will not have a material adverse effect onthe company.
- Eastern is the plaintiff in a $200 million lawsuit filedagainst United Steel for damages due to lost profits from rejectedcontracts and for unpaid receivables. The case is in final appealand legal counsel advises that it is probable that Eastern willprevail and be awarded $100 million.
- At March 15, 2019, Eastern knows a competitor has threatenedlitigation due to patent infringement. The competitor has not yetfiled a lawsuit. Management believes a lawsuit is reasonablypossible, and if a lawsuit is filed, management believes damages ofup to $33 million are reasonably possible.
Required:
1. Determine the appropriate means of reportingeach situation.
2. Prepare the appropriatejournal entries for these situations.
