Issue: Sunrise Pools, Inc., is being sued by the Crescent Club for negligence when installing a new pool on Crescent Club’s property. Crescent Club alleges that the employees of Sunrise Pools damaged the foundation of the clubhouse and part of the golf course while operating heavy machinery to install the pool.
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#10
Issue: Sunrise Pools, Inc., is being sued by the Crescent Club for negligence when installing a new pool on Crescent Club’s property. Crescent Club alleges that the employees of Sunrise Pools damaged the foundation of the clubhouse and part of the golf course while operating heavy machinery to install the pool.
The lawsuit is for $1.5 million. At the time of the alleged incident, Sunrise Pools carried only $600,000 of liability insurance.
While reviewing the draft of Sunrise Pools’ annual report, its president deletes all references to this lawsuit. She is concerned that disclosure of this lawsuit in the annual report will be viewed by Crescent Club as admission of Sunrise’s wrongdoing, even though she privately admits that Sunrise employees were careless and believes that Sunrise Pools will be found liable for an amount in excess of $1 million. The president sends the amended draft of the annual report to the vice president of finance with a note stating that the lawsuit will not be disclosed in the annual report and that the lawsuit will not be disclosed to the board of directors.
Questions to be Answered:
- Is the president’s concern valid?
- What ethical problems will the vice president of finance face if he follows the president’s instructions?
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- EYK10-7. Accounting Ethics Case Sunrise Pools, Inc., is being sued by the crescent club for negligence when installing a new pool on crescent club's property. Crescent club alleges that the employees of Sunrise Pools damaged the foundation of the clubhouse and part of the golf course while operating heavy machinery to install the pool. The lawsuit is for $1.5 million. At the time of the alleged incident, Sunrise Pools carried only $600,000 of liability insurance. while reviewing the draft of Sunrise Pools' annual report, its president deletes all references to this lawsuit. She is concerned that disclosure of this lawsuit in the annual report will viewed by Crescent Club as admission of Sunrise's wrongdoing, even though she privately admits that Sunrise Employees were careless and believes that Sunrise Pools will be found liable for an amount in excess of $1 million. The president sends the amended draft of the annual report to the vice president of finance with a note stating that the…a b Weaver Company is being sued by a former employee, Weaver believes that there is a remote chance that the employee will win. The employee suing Weaver for damages of $40,000 Gulf Refinery had a gas explosion on one of its oil rigsGulf believes it is likely that it will have to pay environmental clean-up costs and damages in the future due to the gas explosion. Gulf cannot estimate the amount of the damages Lawson Enterprises estimates that it will have to pay $75,000 in warranty repairs next yearSuperb Corporation is being sued for illness caused to local residents as a result of negligence on the company's part in permitting the local residents to be exposed to highly toxic chemicals from its plant. Superb’s lawyer states that it is probable that Superb will lose the suit and be found liable for a judgment costing Superb anywhere from $1,200,000 to $6,000,000. However, the lawyer states that the most probable cost is $3,600,000. As a result of the above facts, Superb should accrue Select one: a loss contingency of $3,600,000 and disclose an additional contingency of up to $2,400,000. a loss contingency of $3,600,000 but not disclose any additional contingency. a loss contingency of $1,200,000 and disclose an additional contingency of up to $4,800,000. no loss contingency but disclose a contingency of $1,200,000 to $6,000,000.
- Superb Corporation is being sued for illness caused to local residents as a result of negligence on the company's part in permitting the local residents to be exposed to highly toxic chemicals from its plant. Superb's lawyer states that it is probable that Superb will lose the suit and be found liable for a judgment costing Superb anywhere from $1,200,000 to $6,000,000. However, the lawyer states that the most probable cost is $3,600,000. As a result of the above facts, Superb should accrue Select one: а. no loss contingency but disclose a contingency of $1,200,000 to $6,000,000. O b. a loss contingency of $1,200,000 and disclose an additional contingency of up to $4,800,000. Ос. a loss contingency of $3,600,000 but not disclose any additional contingency. O d. a loss contingency of $3,600,000 and disclose an additional contingency of up to $2,400,000.Wooten Co. is being sued for illness caused to local residents as a result of negligence on the company's part in permitting the local residents to be exposed to highly toxic chemicals from its plant. Wooten's lawyer states that it is probable that Wooten will lose the suit and be found liable for a judgment costing Wooten anywhere from $1,800,000 to $9,000,000. However, the lawyer states that the most probable cost is $5,400,000. As a result of the above facts, Wooten should accrue A) a loss contingency of $1,800,000 and disclose an additional contingency of up to $7,200,000. B) a loss contingency of $5,400,000 and disclose an additional contingency of up to $3,600,000. C) a loss contingency of $5,400,000 but not disclose any additional contingency. D) no loss contingency but disclose a contingency of $1,800,000 to $9,000,000.Vaughn Manufacturing is being sued for illness caused to local residents as a result of negligence on the company's part in permitting the local residents to be exposed to highly toxic chemicals from its plant. Vaughn's lawyer states that it is probable that Vaughn will lose the suit and be found liable for a judgment costing Vaughn anywhere from $1820000 to $8970000. However, the lawyer states that the most probable cost is $5370000. As a result of the above facts, Vaughn should accrue O a loss contingency of $5370000 but not disclose any additional contingency. O a loss contingency of $1820000 and disclose an additional contingency of up to $7150000. O no loss contingency but disclose a contingency of $1820000 to $8970000. O a loss contingency of $5370000 and disclose an additional contingency of up to $3600000.
- Bu Co. is being sued for illness caused to local residents as a result of negligence on the company's part in permitting the local residents to be exposed to highly toxic chemicals from its plant. Bu's lawyer states that it is probable that Bu will lose the suit and be found liable for a judgment costing Bu anywhere from P1,600,000 to P8,000,000. However, the lawyer states that the most probable cost is P 4,800,000. As a result of the above facts, Bu should accrue: *a. a loss contingency of P 4,800,000 and disclose an additional contingency of up to P 3,200,000b. a loss contingency of P 1,600,000 and disclose an additional contingency of up to P 6,400,000c. a loss contingency of P 4,800,000 but not disclose any additional contingencyd. no loss contingency but disclose a contingency of P 1,600,000 to P 8,000,000Several months ago, Jones Company experienced a spill of hazardous materials into the White River from one of its plants. As a result, the Environmental Protection Agency (EPA) fined the company $405,000. The company contested the fine. In addition, an employee is seeking $180,000 damages related to the spill. Finally, a homeowner has sued the company for $260,000. Although the homeowner lives 30 miles downstream from the plant, he believes that the spill has reduced his home’s resale value by $260,000. Jones’ legal counsel believes the following will happen in relationship to these incidents: (a) It is probable that the EPA fine will stand. (b) An out-of-court settlement for $165,000 has recently been reached with the employee, with the final papers to be signed next week. (c) Counsel believes that the homeowner’s case is weak and will be decided in favor of Jones Company. (d) Other litigation related to the spill is possible, but the damage amounts are uncertain. …Several months ago, Ayers Industries Inc. experienced a hazardous materials spill at one of its plants. As a result, the Environmental Protection Agency (EPA) fined the company $430,000. The company is contesting the fine. In addition, an employee is seeking $540,000 in damages related to the spill. Lastly, a homeowner has sued the company for $270,000. The homeowner lives 30 miles from the plant, but believes that the incident has reduced the home's resale value by $270,000. Ayers’ legal counsel believes that it is probable that the EPA fine will stand. In addition, counsel indicates that an out-of-court settlement of $230,000 has recently been reached with the employee. The final papers will be signed next week. Counsel believes that the homeowner's case is much weaker and will be decided in favor of Ayers. Other litigation related to the spill is possible, but the damage amounts are uncertain. a. Journalize the contingent liabilities associated with the hazardous materials…
- Several months ago, Ayers Industries Inc. experienced a hazardous materials spill at one of its plants. As a result, the Environmental Protection Agency (EPA) fined the company $470,000. The company is contesting the fine. In addition, an employee is seeking $540,000 in damages related to the spill. Lastly, a homeowner has sued the company for $300,000. The homeowner lives 30 miles from the plant, but believes that the incident has reduced the home's resale value by $300,000. Ayers’ legal counsel believes that it is probable that the EPA fine will stand. In addition, counsel indicates that an out-of-court settlement of $230,000 has recently been reached with the employee. The final papers will be signed next week. Counsel believes that the homeowner's case is much weaker and will be decided in favor of Ayers. Other litigation related to the spill is possible, but the damage amounts are uncertain. a. Journalize the contingent liabilities associated with the hazardous materials…Sheila Company is engaged in the manufacture of chemicals which it exports to other countries. On December 25, 2021, one of its tanks in the production assembly plant exploded. Unfortunately one of its employees was caught by the accident and suffered severe burns all over his body. For damages sustained because of the explosion, the employee sued Sheila and claimed an amount totaling P10,000,000 for physical injuries sustained. The lawyers of Sheila expect that Sheila Company will probably lose the lawsuit and estimate that the company may have to pay an amount in the range of P5,000,000 to P8,000,000. On March 15, 2022, upon the advice of his lawyers, the injured employees offered to have an out of court settlement of P7,500,000. The offer was tendered on the same date and Sheila on the advice of its legal counsel accepted the said offer on March 20, 2022. Sheila’s financial statements for the year ended 2021 was issued on March 30, 2022. Sheila’s financial statements for the year…In March year 2, an explosion occurred at Nilo Co.'s plant, causing damage to area properties. By May year 2, no claims had yet been asserted against Nilo. However, Nilo's management and legal counsel concluded that it was reasonably possible that Nilo would be held responsible for negligence, and that $3,000,000 would be a reasonable estimate of the damages. Nilo's $5,000,000 comprehensive public liability policy contains a $300,000 deductible clause. In Nilo's December 31, year 2 financial statements, for which the auditor's fieldwork was completed in April year 3, how should this casualty be reported? As a footnote disclosing a possible liability of $300,000. As a footnote disclosing a possible liability of $3,000,000. No footnote disclosure or accrual is required for year 3 because the event occurred in year 2. As an accrued liability of $300,000.