Problem 17

c. The definitions, recognition criteria, and measurement concepts in the IASB Framework. d. An IASB Standard or Interpretation that deals with similar and related issues. 16. An entity can justify a change in accounting policy if a. The charge will result in a reliable and more relevant presentation of the financial statements. b. The entity encounters new transactions that are substantively different from exist- ing or previous transactions. c. The entity previously accounted for similar, though immaterial, transactions under an unacceptable accounting method. d. An alternative accounting policy gives rise to a material change in current year net income. 17. In Year 1, Better Sleep Company began to receive complaints from physicians that patients were experiencing unexpected side effects from the company's sleep apnea drug. The company took the drug off the market near the end of Year 1. During Year 2, the company was sued by 1,000 customers who had had a severe allergic reaction to the company's drug and required hospitalization. At the end of Year 2, the company's attorneys estimated a 60 percent chance the company would need to make payments in the range of $1,000 to $5,000 to settle each claim, with all amounts in that range being equally likely. At the end of Year 3, while none of the cases had been resolved, the company's attorneys now estimated an 80 percent probability the company would be required to make payments in the range of $2,000 to $7,000 to settle each claim. In Year 4, 400 claims were settled at a total cost of $1.2 million. Based on this experience, the company believes 30 percent of the remaining cases will be settled for $3,000 each, 50 percent will be settled for $5,000, and 20 percent will be settled for $10,000. Required: Prepare journal entries for Years 1-4 related to this litigation. 18. On June 1, Year 1, Charley Horse Company entered into a contract with Good Feed Company to purchase 1,000 bales of organic hay on January 30, Year 2, at a price of $30 per bale. The hay will be grown especially for Charley Horse and is needed to feed the company's herd of bison. On December 1, Year 1, Charley Horse sells its herd of bison. As a result, the company no longer has a need for the organic hay that will be delivered on January 30, Year 2, and the company does not believe it will be able to sell the hay to a third party. Charley Horse is able to cancel the contract with Good Feed for a cancellation fee of $20,000. Required: Determine what accounting entries, if any, Charley Horse Company should make on December 31, Year 1, related to the contract to purchase 1,000 bales of hay on January 30, Year 2. 19. The board of directors of Chestnut Inc. approved a restructuring plan on November 1, Year 1. On December 1, Year 1, Chestnut publicly announced its plan to close a manu- facturing division in New Jersey and move it to China and the company's New Jersey