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Make the original lease entry

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Reference no: EM131211281

During the current year, P & P Products was involved in two lawsuits. In the first lawsuit, P & P Products was sued by two employees who claimed that they were injured by potentially defective containers that came apart during loading. The company’s attorney has determined that there is a high probability that the jury will grant punitive damages of $1,000,000. In the second lawsuit, P & P Products sued a vendor for failure to comply with design specifications, which resulted in the faulty containers that caused the injuries listed in the first lawsuit. P & P Products is suing for $2,500,000 in damages to cover payment for the first lawsuit and damage to the company’s reputation. The company’s attorney is confident that the company will be successful.

Required: a. How should P & P account for the first lawsuit?

b. How should P & P account for the second lawsuit?

Problem 1 On January 1, 2014, P & P Products entered into an agreement to lease a piece of equipment from Beta Company, Inc. (the lessor). The lease term is five years and the interest rate is 8 percent. The first payment is made on January 1, 2014. The machine has a fair value of $600,000, a useful life of six years and no residual value. P & P Products does not know the interest rate that Beta uses. Assume that the entries have not yet been made on the books of P & P Products. Required: Make the original lease entry(ies) on January 1, 2014.

Reference no: EM131211281

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