[calvin85sg]

Need some pointers for the following question. Please help!


The following selected transactions relate to provisions or contingencies of Classical Tool Makers, Inc. which began operations in July 2009. Classical's fiscal year ends on December 31. Financial statements are published in April 2010.

Required:
Prepare the appropriate journal entries to record any amounts that should be recorded and indicate whether a disclosure note is necessary.

1. In December 2009, the state of Tennessee filed suit against Classical, seeking penalties for violations of clean air laws. On January 23, 2010, Classical reached a settlement with state authorities to pay $1.5 million in penalties.

2. Classical is the plaintiff in a $4 million lawsuit filed against a supplier. The suit is in final appeal and attorneys advise that it is virtually certain that Classical will win the case and be awarded $2.5 million.

3. In November 2009, Classical became aware of a design flaw in an industrial saw that poses a potential electrical hazard. A product recall appears unavoidable. Such an action would likely cost the company $500,000.

4. On November 1, 2009, Classical borrowed $16 million through the issuance of a 9-month, 12% note payable. Interest was payable at maturity.

[rehmanvohra]

Contingencies are events with uncertain outcomes, such as a potential liability that may become an actual liability sometime in the future - quoted from Financial Accounting by Kimmel, Weygant and Kieso.

International Accounting Standard 37 provides a wider explanation. Please check the attached file

Applying this theory, consider each of the four transactions and events. You will find your answer