Question
Determine which of the following transactions represent contingent liabilities for Pali Gap Rental and indicate the proper accounting treatment at the company's fiscal year-end, by
Determine which of the following transactions represent contingent liabilities for Pali Gap Rental and indicate the proper accounting treatment at the company's fiscal year-end, by placing the letter of the correct accounting treatment in the space provided.
a. Accrue a liability and disclose in the financial statement notes
b. Disclose in the financial statement footnotes only
c. No disclosure
| 1. | Pali Gap Rental cosigned a loan for $100,000 due in one year for Lightening Company. Lightening is a very profitable company and is very liquid, making it a remote chance Pali Gap will have to pay the loan |
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| 2. | Pali Gap Rental filed a lawsuit against Jane Rental for trademark infringement. Pali Gaps legal counsel believes it is probable that Pali Gap will win the suit and estimates the settlement to be $6,000,000. |
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| 3. | One of Pali Gaps rental tents collapsed at a wedding and injured the bride and groom. Pali Gaps legal counsel believes it is probable that Pali Gap will have to pay damages of $1,000,000. |
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| 4. | Pali Gap Rental is being audited by the Internal Revenue Service. Its tax returns for the past two years are being examined. At the company's year-end, the audit is still in process. Pali Gaps CPA believes that payment of significant taxes is possible. |
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