Augsburg Soup Company had the following issues at December 31, 2015. For each, d
ID: 2473365 • Letter: A
Question
Augsburg Soup Company had the following issues at December 31, 2015. For each, determine what would have to be done for financial statements. If an entry is required, show the journal entry. Augsburg was sued on December 1, 2015 for delivering bad soup which made customers ill. The attorneys have met and decided it is probable that Augsburg Company will lose somewhere between $1,800,000 and $2,700,000 in a settlement by mid-2016. Augsburg lost its soup factory in Frogistan when the government there had a revolution and expropriated (stole) the factory. The loss of the factory amounting to $15,000,000 was recorded. The new government promises to compensate Augsburg, but it is not known when it will do so. If the new government fails to do so, then Cragganmore Insurance will pay an estimated sum minus a $400,000 deductible. Augsburg is in a tax dispute with the Internal Revenue Service. They expect to win, although the IRS has billed them for $3,500,000. Augsburg's local factory was lost in a fire. The loss of $8,000,000 was recorded. At December 31, 2015, they are working with their insurance company to file a claim. The insurance company has a $100,000 deductible but is looking into an issue of the fire being caused by lack of maintenance of equipment on the part of Augsburg.Explanation / Answer
Augsburg Soup Company All Amounts in $ a. Since the liability is contingent on the settlement of the case, the amount which is liable to be paid ($ 1,800,000 to $ 2,700,000) needs to be shown as a "Contingent Liability" in the Notes to Accounts. b. Loss on Factory A/c 1500000 To Factory A/c 1500000 For compensation, a explanatory note needs to be provided in the Notes to Accounts in the Financial Statements, signifying the facts of the case and also the point that that Insurance Company may pay an amount of $ 14,960,000 on settlement of the compensation claim (deduction of $ 400,000 towards charges of the Insurance Company). c. Income Taxes A/c 3500000 To Income Taxes Payable A/c 3500000 The fact of the case being in court, and settlement pending, needs to be shown by way of an explanatory note in the Notes to Accounts. d. Loss on Factory A/c 8000000 To Factory A/c 8000000 Amount of the claim pending settlement, after deductible adjusted by the Insurance Company, needs to be shown separately by way of an explanatory note in the Financial Statements - Notes to Accounts.
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