“I see an all-nighter coming on,” Gayle grumbled. “Why 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 2011, and the 2011 financial statements are issued on March 15, 2012.1. During 2011, 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 1, 2012. It is virtually certain that material costs will be incurred but the amount of possible costs cannot be reasonably ascertained.2. In accordance with a 2009 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 2010. A. J. Conner has filed for bankruptcy. The bankruptcy court on February 4, 2012, 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 31, 2010. Sales of warranted products during 2011 were $2,100 million and actual warranty expenditures were $40 million. Expenditures in excess of the existing liability were debited to warranty expense.4. Western is involved in a suit filed in January 2012 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 2011. 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 but material amount not expected to have a material adverse effect on the Company’s financial position.Required:1. Determine the appropriate means of reporting each situation.2. In a memo to the audit manager, Mitch Riley, explain your reasoning for each situation. Include any necessary journal entries and drafts of appropriate disclosure notes.
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