Reference no: EM132624287

Question - "I see an all-nighter coming on," Vanya mumbled. "Why did Reginald just now give us this assignment?" Your client, Umbrella Company is involved with several situations that possibly involve contingencies. The assignment Reginald refers to is to draft appropriate accounting treatment for each situation described below in time for tomorrow's meeting of the audit group. Umbrella Company's financial year is the calendar year 2022, and the 2022 financial statements are issued on March 15, 2023.

1. During 2022, Umbrella Co. 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, 2023. It is virtually certain that material costs will be incurred but the amount of possible costs cannot be reasonable ascertained.

2. In accordance with a 2020 contractual agreement with A.H. Company, Umbrella Co. is entitled to $37 million for certain fees and expense reimbursements. These were written off as bad debts in 2021. A.H. Company has filed for bankruptcy. The bankruptcy court on February 4, 2023, ordered A.H. Company to pay $23 million immediately upon consummation of a proposed merger with Five Holding Group.

3. Umbrella Co. 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, 2021. Sales of warranted products during 2022 were $2,100 million and actual warranty expenditures were $40 million. Expenditures in excess of the existing liability were debited to warranty expense.

4. Umbrella Co. is involved in a suit filed in January 2023 by Commission Holdings seeking $88 million, as an adjustment to the purchase price in connection with the Company's sale of its textile business in 2022. The suit alleges that Umbrella misstated the assets and liabilities used to calculate the purchase price of the textile division. Legal counsel advises that it is reasonably possible that Umbrella could end up losing an undeterminable amount not expected not to have a material adverse effect on the Company's financial position.

5. Umbrella is a supplier under a non-cancellable contract signed October 2022 to provide 100,000 units of computer parts to its customer, Pogo Company, at $2.00 per piece. The cost of producing the parts has increased to $3.00 per piece as a result of a worldwide material shortage. Umbrella has an obligation to deliver the 100,000 units during the financial year ending December 31, 2023.

Required -

1. Find the appropriate means of reporting each situation.

2. In a memo to the audit manager, Reginald, explain your reasoning. Include any necessary journal entries and drafts of appropriate disclosure notes.