Auditing

In an audit of the Misfit Corporation as of December 31, 2019, the following situations exist. No entries have been made in the accounting records in relation to these items. i (Click the icon to view the situations.) i More Info - X 1. During the year 2019, the Misfit Corporation was named as a defendant in a suit for damages by the Dogtown Company for breach of contract. An adverse decision to the Misfit Corporation was rendered and the Dogtown Company was awarded $1,500,000 damages. At the time of the audit, the case was under appeal to a higher court. 2. On December 23, 2019, the Misfit Corporation declared a common stock dividend of 6,000 shares with a par value of $3,000,000 of its common stock, payable February 2, 2020, to the common stockholders of record December 30, 2019. 3. The Misfit Corporation has guaranteed the payment of interest on the 10-year, first mortgage bonds of the Needle Company, an affiliate. Outstanding bonds of the Needle Company amount to $2,000,000 with interest payable at 10 percent per annum, due June 1 and December 1 of each year. The bonds were issued by the Needle Company on December 1, 2017, and all interest payments have been met by that company with the exception of the payment due December 1, 2019. The Misfit Corporation states that it will pay the defaulted interest to the bondholders on January 15, 2020.Requirement Describe the nature of the adjusting entries or disclosure, if any, you would make for each of these situations. Select the appropriate nature of the adjusting entries or disclosure, if any, needed for each situation, beginning with situation 1. 1. During the year 2019, the Misfit Corporation was named as a defendant in a suit for damages by the Dogtown Company for breach of contract. An adverse decision to the Misfit Corporation was rendered and the Dogtown Company was awarded $1,500,000 damages. At the time of the audit, the case was under appeal to a higher court. (Assume that the likelihood of Misfit having to pay the $1,500,000 damages is reasonably possible.) O A. The lawsuit should be described in a footnote to the balance sheet along with an adjustment to the financial statement accounts. O B. The lawsuit should be described in a footnote to the balance sheet. O C. No disclosure or adjustment is necessary. 2. On December 23, 2019, the Misfit Corporation declared a common stock dividend of 6,000 shares with a par value of $3,000,000 of its common stock, payable February 2, 2020, to the common stockholders of record December 30, 2019. O A. The declaration of such a dividend creates a liability in 2019 and thus, a journal entry should be made in 2019. B. No entry is necessary, but an indication of the action taken, and that such a transfer will subsequently be made, should be shown as a footnote or as a memorandum to retained earnings and common stock in the balance sheet. O C. No disclosure or adjustment is necessary. 3. The Misfit Corporation has guaranteed the payment of interest on the 10-year, first mortgage bonds of the Needle Company, an affiliate. Outstanding bonds of the Needle Company amount to $2,000,000 with interest payable at 10 percent per annum, due June 1 and December 1 of each year. The bonds were issued by the Needle Company on December 1, 2017, and all interest payments have been met by that company with the exception of the payment due December 1, 2019. The Misfit Corporation states that it will pay the defaulted interest to the bondholders on January 15, 2020. (Assume that the likelihood of Misfit Corporation having to pay the December 1, 2019 defaulted interest is probable.) O A. No disclosure or adjustment is necessary. O B. A journal entry should be made as of December 31, 2019, to reflect the contingent liability. The balance sheet should also be footnoted to the effect that the Misfit Corporation is contingently liable for future interest payments on Needle Company bonds O C. No entry is necessary, but the income statement should be footnoted to disclose that Misfit Corporation is contingently liable for future interest payments on Needle Company bonds.Now record any adjusting entry required by each situation as of December 31, 2019. (Record debits first, then credits. Exclude explanations from any journal entries. Select "No entry required" on the first line of the Accounts column if an adjusting entry is not needed and leave all other input fields blank.) Begin by recording any adjusting entry required by situation 1. Journal Entry Date Accounts Debit Credit Dec 31 Next, record any year-end adjusting entry required by situation 2. Journal Entry Date Accounts Debit Credit Dec 31 Now record any year-end adjusting entry required by situation 3. Journal Entry Date Accounts Debit Credit Dec 31