Altabet Company is completing its financial statements for the year ended April 30, 2011. Janet Kramer, Altabet's controller, is reviewing the company's legal correspondence and trying to decide which, if any, of the contingencies facing the company need to be accrued and reported in the financial statements. During her review, Ms. Kramer identified three contingencies:
1. In July 2009, Jeff Altabet, a son of the company's owner, needed to borrow $400,000. He negotiated with a bank for a five-year loan requiring monthly payments of principal and interest. Because he had just graduated and had no credit history, the company guaranteed the note, stating that if Jeff failed to make three consecutive payments Altabet would repay the loan in full. Jeff has invested the money in a business venture that is turning out to be very profitable. He has made every required payment on the note thus far, and expects to be able to repay the remaining balance of $200,000 within the next year. As at April 30, 2011, Ms. Kramer still considers the balance of the loan to be significant.
2. In October 2010, the company was sued for breach of contract concerning the sale of some equipment to a local manufacturer. The manufacturer claims that because Altabet did not deliver the equipment in the period specified by the contract, the manufacturer lost profits of $50,000. Correspondence with Altabet's lawyer indicates that there was no breach of contract, because the manufacturer was late in making the required advance payment and therefore Altabet was justified in delaying the delivery of the equipment. The lawyer feels that this is a nuisance suit and believes there is little possibility of the manufacturer being successful. Ms. Kramer does not consider the potential loss to be significant.
3. In January 2011, Terry Chambers fell on some ice in Altabet's parking lot. As a result of the fall, Ms. Chambers suffered a concussion and a broken arm that required a two-day hospital stay. She is suing Altabet for $600,000 to cover her medical bills, loss of income, and personal suffering. Altabet's lawyer feels that the company will probably lose the suit and has strongly advised it to settle out of court. On April 25, 2011, Altabet instructed its lawyer to offer Ms. Chambers a settlement of $300,000. Although she has not yet responded to the company's offer, the lawyer believes it is a reasonable offer and is hopeful that Ms. Chambers will accept it.
Required:
With reference to the criteria for reporting contingent liabilities, discuss the appropriate treatment for each of the above contingencies with respect to the April 30, 2011, financial statements of Altabet Company.