Your audit client, Coronado Industrial, is facing several situations that could involve contingencies. You have been asked to draft a memo to the company's controller, with a recommendation for the appropriate accounting treatment for each situation described below. Coronado's fiscal year is the calendar year 2014 and financial statements will be issued in March 2015.
1. The company experienced a labor dispute in 2014 that has not been resolved at year-end. Negotiations continue to take place, but employees at one plant went on strike in February 2015. The costs of the strike are expected to be material, but the amount cannot be estimated with any reasonable certainty.
2. Coronado successfully sued Eastern Alliance Corp. for breach of contract and in July 2014 was awarded $12 million in damages. Eastern Alliance has appealed the ruling. 3. Coronado warrants its products against defects for a period of one year from sale. Warranty costs are
expected to approximate 1.5% of sales. A warranty liability of $40 million was reported at December 31, 2013. Sales of warranted products during 2014 were $3,000 million and actual warranty expenditures in 2014 were $39 million. 4. Coronado is facing a suit from the State of Colorado seeking penalties for violation of clean-air laws. The company is facing penalties of $500,000. Legal counsel advises that it is reasonably possible that Coronado will end up paying a penalty, but believes they can settle for an amount that will not have a
material adverse effect on Coronado's financial position.
Required:
Draft a memo with recommendations on the appropriate means of reporting each of the four situations.
Include any necessary journal entries and drafts of appropriate disclosure notes.