Fallon Company, a toy manufacturer that also operates several retail outlets, is preparing its December $31$ financial statements. It has identified the following legal situations that may qualify as contingencies:

$1.$ A customer is suing the company for $$800,000$ in damages because her child was injured in November while riding an escalator that stopped suddenly in one of its stores. The child was hurt when he tripped and fell while walking $$down$$ an escalator that was going $$up$.$ Legal counsel feels that the child is partially at fault, but that it is probable that the lawsuit will be settled for between $$50,000$ and $$100,000,$ with $$80,000$ being the most likely amount.

$2.$ Fallon has discovered that a skateboard it began manufacturing and selling during the year has defective bearings, sometimes causing a wheel to fall off. Fallon has issued a $$recall$$ notice in newspapers and magazines in which it offers to replace the bearings. It estimates a cost of $$200,000$ for these repairs. No lawsuits have been filed for injury claims, although the company feels that there is a reasonable possibility that claims may total as high as $$2$ million.

$3.$ Fallon has an incinerator behind one of its retail outlets which is used to burn cardboard boxes received in shipments of inventory from suppliers. The state environmental protection agency filed suit against the company in August for air pollution. Fallon expects to stop using the incinerator and begin recycling. However, its lawyers believe that it is probable that a fine of between $$40,000$ and $$60,000$ will be levied against the company, although they cannot predict the exact amount.

$4.$ Fallon signed a contract with a computer vendor to install $$state$-$of$-$the$-$art$$ cash registers in all of its retail outlets. Because of the vendor$$s inability to acquire sufficient cash registers, the vendor canceled the contract. Fallon has filed a breach of contract suit against the vendor, claiming $$300,000$ in damages. The company$$s lawyers expect that it will settle the suit $$out of court$$ for $$150,000.$

Required:

For each situation, prepare the journal entry $($if any$)$ on December $31$ to record the information for Fallon, and explain your reasoning. If no journal entry is recorded, explain how the information would be disclosed in Fallon$$s annual report.

Answer rating: 100% (QA)

1 Customer Lawsuit There is a probable loss related to the customer lawsuit Therefore Fallon Company should record a contingent liability and correspo... View the full answer