978-1259722660 Chapter 13 Solution Manual Part 8

Communication Case 13–7

Assumptions students make will determine the correct answer to some

classifications. Depending on the assumptions made, different views can be

convincingly defended. The process of developing and synthesizing the arguments

will likely be more beneficial than any single solution. Each student should benefit

from participating in the process, interacting first with his or her partner, then with

the class as a whole. It is important that each student actively participate in the

process. Domination by one or two individuals should be discouraged.

A significant benefit of this case is forcing students’ consideration of why

liabilities currently due are sometimes classified as long term. It also requires

them to carefully consider the profession’s definition of current liabilities.

Arguments likely will include the following:

a. Commercial paper

If it’s assumed that early April is prior to the actual issuance of the financial

statements, then $12 million can be reported as long term, but $3 million must be

reported as a current liability. Short-term obligations that are expected to be

refinanced with long-term obligations can be reported as noncurrent liabilities only

If it’s assumed that early April is after the actual issuance of the financial

b. 11% notes

The debt should be reported as a current liability because it is payable in the

Case 13–7 (concluded)

c. 10% notes

Short-term obligations that are expected to be refinanced with long-term

obligations can be reported as noncurrent liabilities only if the firm (a) intends to

refinance on a long-term basis and (b) actually has demonstrated the ability to do

d. Bonds

If it’s assumed that March 15 is prior to the actual issuance of the financial

statements, the bonds can be reported as noncurrent liabilities. The firm (a)

Communication Case 13–8

Memorandum:

To: Mitch Riley

From: Your Name

Re: Accounting for contingencies

Below is a brief overview of my initial thoughts on how Western should account

for the four contingencies in question.

1. The labor disputes constitute a loss contingency. Though a loss is probable,

the amount of loss is not reasonably estimable. A disclosure note is

appropriate:

_______________________________

Note X: Contingency

2. The A. J. Conner matter is a gain contingency. Gain contingencies are not

accrued even if the gain is probable and reasonably estimable. The gain

should be recognized only when realized.

_______________________________

Note X: Contingency

In accordance with a 2016 contractual agreement with A.J. Conner

Company, the Company is entitled to $37 million for certain fees and

Case 13–8 (concluded)

3. The contingency for warranties should be accrued. During the period

Western would make the following journal entries:

4. The Crump Holdings lawsuit is a loss contingency. Even though the lawsuit

occurred in 2019, the cause for the action occurred in 2018. Only a

disclosure note is needed because an unfavorable outcome is reasonably

possible, but not probable. Also, the amount is not reasonably estimable.

_______________________________

Note X: Contingency

Crump Holdings filed suit in January 2019 against the Company seeking

We can discuss these further in our meeting later today.

Judgment Case 13–9

This is a loss contingency. Valleck can use the information from the February

negotiations (occurring after the end of the year) in determining appropriate

The disclosure note should also indicate that accrual was made. This can be

accomplished by adding the following sentence to the end of the note:

Communication Case 13–10

Suggested Grading Concepts and Grading Scheme:

Content (80% )

20 Identifies the situation as a change in estimate.

The liability was originally (appropriately) estimated as

$750,000.

The final settlement indicates the estimate should be revised.

Bonus (4) Provides detail regarding the disclosure note.

A disclosure note should describe the effect of a

change in estimate on key items.

Writing (20%)

5 Terminology and tone appropriate to the audience of a vice

president.

Research Case 13–11

A liability is accrued if it is both probable that a loss will occur and the

amount can be at least reasonably estimated. If one or both of these criteria is not

Often such disclosure notes provide only a very general description of

The relevant GAAP can be accessed in the FASB’s Codification Research

Communication Case 13–12

Suggested Grading Concepts and Grading Scheme:

Content (80% )

30 Warranty for awnings (5 each; maximum of 30 for this part)

Change in estimate.

Change is effected prospectively only.

30 Clean air lawsuit (5 each; maximum of 30 for this part)

Change in estimate.

Change is effected prospectively only.

Bonus (4) Provides detail regarding the disclosure note.

A disclosure note should describe the effect of a

Writing (20%)

5 Terminology and tone appropriate to the audience of

division managers.

Real World Case 13–13

Requirement 1

In accordance with GAAP, when a contingency exists as of the end of a

fiscal year, in assessing whether a loss is probable and measurable and therefore

should be recorded in its financial statements, Morgan Stanley is required to take

into consideration all information up to and including the date of issuance of its

Requirement 2

($ in millions)

Litigation······························································

Requirement 3

If the settlement had occurred after the February 25 financial statement

date, the company still should accrue a liability if a loss is probable and can be

Ethics Case 13–14

Discussion should include these elements.

Warranty estimate

The cost of product warranties (or product guarantees) cannot be predicted with

certainty. However, to match expenses and revenues, we estimate the cost. The

Ethical Dilemma:

Is Craig’s obligation to challenge the questionable change in estimates greater

than the obligation to the financial interests of his employer and bosses?

Who is affected?

Craig

President, controller, and other managers