Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 11: Q12SE (page 606)

Freeman Motors, a motorcycle manufacturer, had the following contingencies.

a. Freeman estimates that it is reasonably possible but not likely that it will lose a current lawsuit. Freeman’s attorneys estimate the potential loss will be \(4,500,000.

b. Freeman received notice that it was being sued. Freeman considers this lawsuit to be frivolous.

c. Freeman is currently the defendant in a lawsuit. Freeman believes it is likely that it will lose the lawsuit and estimates the damages to be paid will be \)75,000.

Determine the appropriate accounting treatment for each of the situations Freeman is facing.

Short Answer

Expert verified

A contingency is a possibly undesirable future occurrence, such as a natural disaster, fraudulent conduct, or economic recession.

Step by step solution

01

Answer of part a.

Freeman's estimation of reasonably possible to lose a current lawsuit is $4,500,000. This possible contingency should be described in the notes to the financial statements.

02

Answer of part b.

Freeman received notice of a frivolous lawsuit. This is a remote contingency. The company does not need to record a liability and does not need to disclose it in the notes to the financial statements.

03

  Step 3: Answer of part c.

Freeman is currently the defendant in a lawsuit. If he loses estimates, the damages to be paid will be $75,000. These contingencies that are probable and can be estimated are recorded as a liability and an expense accrued.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

How might a business use a payroll register?

Erin O’Neil Associates reported short-term notes payable and salaries payable as follows:

2018

2017

Current Liabilities—partial:

Short-term Notes Payable

\(16,900

\) 16,000

Salaries Payable

3,400

4,000

During 2018, O’Neil paid off both current liabilities that were left over from 2017, borrowed cash on short-term notes payable, and accrued salaries expense. Journalize all four of these transactions for O’Neil during 2018. Assume no interest on short-term notes payable of $16,000.

This problem continues the Canyon Canoe Company situation from Chapter 10. Amber and Zack Wilson are continuing their analysis of the company’s position and believe the company will need to borrow \(15,000 in order to expand operations. They consult Rivers Nation Bank and secure a 6%, one-year note on September 1, 2019, with interest due at maturity. Additionally, the company hires an employee, John Vance, on September 1. John will receive a salary of \)3,000 per month. Payroll deductions include federal income tax at 25%, OASDI at 6.2%, Medicare at 1.45%, and monthly health insurance premium of \(250. The company will incur matching FICA taxes, FUTA tax at 0.6%, and SUTA tax at 5.4%. Round calculations to two decimals. Omit explanations on journal entries.

Requirements

  1. Record the issuance of the \)15,000 note payable on September 1, 2019.
  2. Record the employee payroll and employer payroll tax entries on September 30, 2019.
  3. Record all payments related to September’s payroll. Payments are made on October 15, 2019.
  4. Record the entry to accrue interest due on the note at December 31, 2019.

Record the entry Canyon Canoe Company would make to record the payment to the bank on September 1, 2020.

Coltrane Company has a \(5,000 note payable that is paid in \)1,000 instalments over five years. How would the portion that must be paid within the next year be reported on the balance sheet?

On August 10, Swanson Company recorded sales of merchandise inventory on account, \(4,000. The sales were subject to sales tax of 4%. The company uses the perpetual inventory system. On September 30, Swanson paid \)500 of sales tax to the state.

1. Journalize the transaction to record the sale on August 10. Ignore cost of goods sold.
See all solutions

Recommended explanations on Business Studies Textbooks

Business Case Studies

Read Explanation

Nature of Business

Read Explanation

Operational Management

Read Explanation

Influences On Business

Read Explanation

Intermediate Accounting

Read Explanation

Business Operations

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free