Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

New City filed suit against Lobo at the end of 2018 seeking $10 million in civil penalties and injunctive relief based upon violation of the



New City filed suit against Lobo at the end of 2018 seeking $10 million in civil penalties and injunctive relief based upon violation of the New City construction code pertaining to green building standards.   New City alleged that Lobo had violated the code in various projects undertaken over the past two years. At the end of 2019, the parties had engaged in discovery and begun settlement negotiations. Lobo offered to settle for $500,000. New City rejected this amount and countered with $6 million. Lobo's attorney advised that the ultimate settlement would probably be $3.5 to $5 million based on the information learned in discovery, the settlement negotiations thus far, and the risk and expense of a lengthy trial. Lobo's attorney explained that no amount within that range was better estimate than any other amount. New City follows U.S. GAAP.


Required:

1. What amount (if any) did Lobo make at the end of 2019 (make the entry) to accrue a loss?   Why (what conditions must be satisfied for such an accrual)? Was any disclosure required? If so, be specific as to any amounts that should be disclosed and feel free to draft the disclosure note. (You also must cite the applicable provisions of the ASC).

2. Now assume that Lobo properly made an accrual as a litigation loss of $4.3 million in 2019. In late-2020, Lobo entered into a full settlement with the City for a total of $2 million to cover the cost of the violation. What journal entry (if any) should Lobo make at the end of 2020? Why? Hint: What kind of change is this?


Step by Step Solution

3.39 Rating (149 Votes )

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Chemical Principles

Authors: Steven S. Zumdahl, Donald J. DeCoste

7th edition

9781133109235, 1111580650, 978-1111580650

More Books

Students also viewed these Accounting questions

Question

Given the following hypotheses: H0: 20 H1: Answered: 1 week ago

Answered: 1 week ago