SOLVE ISSUE 2

Your accounting firm has just been hired to perform the audit of McQueen International M. for the years ending ended December 31, 2016. You have been assigned to the engagement team for M. You and the engagement manager had an initial meeting with the controller of M. Some of the information you gathered at that initial meeting is provided below along with the marching orders your engagement manager gave you after this meeting

M International (M) and Walsh Inc. (W a competitor of M ) have been engaged in long-standing litigation over a specific patent infringement matter. Below is a summary timeline of specific events that have taken place related to this matter:

-In May, 2015, W filed a claim against M for patent infringement

-For the year ended December 31, 2015, management of M determined that a loss for this matter was probable and represented that the estimate of loss was in the range of $15 million to $20 million, with $17 million being the most likely amount of loss within the range. M recorded the loss contingency in the amount of $17 million.

-The jury reached a verdict on September 24, 2016, and a judgment was ordered in favor of W. The judgment required M to pay $18.5 million to W. M filed an appeal of the verdict on Oct. 15, 2016. Pending the outcome of the appeal no payment has been made as of 12/31/15.

M is unsure of how /whether to include the impact of the verdict in the financials for the year 2016. They are asking your firm for guidance on the correct accounting treatment.

Impairment issues - M is concerned that an impairment loss on some of the older machinery it owns may need to be recorded as a significant adverse change in the extent or manner in which a long-lived asset (machinery group) are being used [Codification] has occurred. The historical cost of the machines is $10,000,000 and as of the end of the fiscal year $6,750,000 of depreciation on the machines has been recorded. Furthermore, Ms management estimates that that the expected future cash flow (undiscounted) from the use and eventual disposal of the machinery is $1,300,000. The fair value of the machines is estimated to be $1,200,000.

M is unsure of current rules insofar as accounting for impairment losses is concerned. As a result, M has opted not to record an impairment loss due to this uncertainty and its current economic situation.

Required:

Instructions from the Engagement Manager: The audit engagement manager has assigned you the task of researching the two accounting issues described below and to prepare two accounting issue memoranda; one for each issue. The two issues are summarized below.

Issue 1: For the year ending December 31, 2016, financial statements what is the correct accounting treatment for the lawsuit? Since a liability had been recorded for 2015 should the verdict result in an adjustment to this liability or should it be a prior period adjustment? Make sure you include any necessary journal entries/disclosure requirements.

Issue 2: Whether or not an impairment loss on the machines should be recorded and if so, the amount on the loss. Should you determine that an impairment loss should be recorded then make sure you include any necessary journal entries/disclosure requirements.

Other Assignment Information Your groups task is to research the accounting issues highlighted by the engagement manager and to prepare an accounting issue memoranda requested by the engagement manager. Use the accounting issue memorandum illustration that was provided in class as a guide. Also, use the handout distributed in class and/or your notes to see what items should be included in the memoranda. Use the FASB Accounting Standards Codification for purposes of performing your research.

These memoranda will be included in the audit workpapers. The engagement team has separately determined that the accounting implications of both of these issues are material to Msfinancial statements. The analysis supporting this determination can be found in the audit workpapers at AA-BB. .

Give solutions to Issue 1 and 2.