Christine Burke has completed field work for the Willingham Corporation engagement, a December 31, 1999 year end audit, and is now deciding whether to modify her report.

Below are two unrelated situations that arose during the engagement:

Situation 1

In September 1999, a lawsuit was filed against Willingham requesting that the court order Willingham to install pollution control equipment at an aged production plant.
Willingham's attorney has informed Burke that the outcome of the litigation cannot be predicted, and management has informed Burke that pollution control equipment is far too costly and that the plant will close if the litigation is lost. In addition, management told Burke that the production plant and equipment had only minimal resale values, and that lost production could not be recovered at other plants.

Situation 2

During 1999, Willingham paid 20 percent of its assets to purchase a franchise granting the exclusive right to produce and sell a newly patented product in the New England states, although there has been no appreciable production or sales of the product anywhere in the U.S. to date. Neither the franchisor nor any U.S. franchisee has conducted market research about the product.

Required: 

For each of the above two situations, discuss the issues Burke should consider (not the type of report Burke should issue). Consider each situation separately, thoroughly, and under the assumption that each is disclosed in notes to the financial statements.