Reference no: EM132489880

Question - The following selected transactions relate to contingencies of XYZ Inc., which began operations in July 2021. XYZ's fiscal year ends on December 31. Financial statements are published in April 2022.

1. XYZ is involved in a lawsuit resulting from a dispute with a customer over a 2021 transaction. At December 31, attorneys advised that it was probable that XYZ would lose $3 million in an unfavorable outcome. On February 12, 2022, judgment was rendered against XYZ in the amount of $14 million plus interest, a total of $15.2 million. XYZ does not plan to appeal the judgment.

2. XYZ is the defendant in a lawsuit filed in January 2022 in which ABC Company seeks $10 million as an adjustment to the purchase price related to the sale of XYZ's hardwood division in 2021. The lawsuit alleges that XYZ misrepresented the division's assets and liabilities. Legal counsel advises that it is reasonably possible that XYZ could lose $5 million, but that it's extremely unlikely it could lose the $10 million asked for.

3. In December 2021, XYZ became aware of an engineering flaw in a product that poses a potential risk of injury. As a result, a product recall appears inevitable. This move would likely cost the company $1.5 million.

4. In November 2021, the State of Vermont filed suit against XYZ, asking civil penalties and injunctive relief for violations of clean water laws. XYZ reached a settlement with state authorities to pay $4.2 million in penalties on February 3, 2022.

5. XYZ is the plaintiff in a $40 million lawsuit filed against a customer for costs and lost profits from contracts rejected in 2021. The lawsuit is in final appeal and attorneys advise that it is virtually certain that XYZ will be awarded $30 million.

6. At March 1, 2022, the EPA is in the process of investigating the possibility of environmental violations at one of XYZ's sites, but has not proposed a penalty assessment. Management feels an assessment is reasonably possible, and if an assessment is made, a settlement of up to $33 million is probable.

Required -

1. Prepare the appropriate journal entries that should be recorded as a result of each of these contingencies. If no journal entry is indicated, state why.

2. For each contingency indicate whether a disclosure not is needed or not.