Project

"1 see an all-nighter coming on," Gayle grumbled. "V-,Thy did Mitch just now

give us this assignment?" Your client, Western Manufacturing, is involved with

several situations that possibly involve contingencies. The assignment Gayle

refers to is to draft appropriate accounting treatment for each situation

described below in time for tomorrow's meeting of the audit group. Western's

fiscal year is the calendar year 2018, and the 2018 financial statements are

issued on March 15, 2019.

l. During 2015, Western experienced labor disputes at three of its plants.

Management hopes an agreement will soon be reached. However negotiations

between the Company and the unions have not produced an acceptable

settlement and, as a result, strikes are ongoing at these facilities since

March l, 2019. It is virtually certain that material costs will be incurred

but the amount of possible costs cannot be reasonably ascertained.

Dispute:

Currently there are disputes going on between management and labor unions

regarding wage rates, after lots of deliberations a mutual conclusion could not

be reached. Management apprehends that company will have to pay a material

amount in the form of compensation but the amount of compensation cannot be

determined with precision hence provision for the same is not recorded in the

books of accounts.

2. In accordance with a 2016 contractual agreement with A. J. Conner Company,

Western is entitled to $37 million for certain fees and expense reimbursements.

These were written off as bad debts in 2017. A. J. Conner has filed for bankruptcy.

The bankruptcy court on February 4, 2019, ordered A. J. Conner to pay $23 million

immediately upon consummation of a proposed merger with Garner Holding Group.

3. Western warrants most products it sells against defects in materials and

workmanship for a period of a year. Based on their experience with previous

product introductions, warranty costs are expected to approximate 2% of sales.

A warranty liability of $39 million was reported at December 3 1, 2017.

Sales of warranted products during 2018 were $2,100 million and actual warranty

expenditures were $40 million.

4. Western IS involved in a suit filed in January 2019 by Crump Holdings

seeking $88 million, as an adjustment to the purchase price in connection with

the Company's sale of its textile business in 2018. The suit alleges that Western

misstated the assets and liabilities used to calculate the purchase price for the

textile division. Legal counsel advises that it is reasonably possible that

Western could end up losing an indeterminable amount not expected to have a

material adverse effect on the Company's financial position.

There is a law suit filed against the company by Crump Holding for sale of its textile division.

As per companys legal counsels opinion it is reasonably possible that company may end up

losing the suit and charges against the company will materialize. Compensation but

amount of compensation cannot be determined with precision hence provision for

the same is not recorded in the books for accounts.

REQUIRED:

1. Determine the appropriate means of reporting each situation.

2. In a memo to the audit manager , Mitch Riley, explain your reasoning.

Include any necessary journal entries and drafts of appropriate disclosure notes.