Linda Reeves, CPA, receives a telephone call from her client, Lane Company. The company’s controller states that the board of directors of Lane has entered into two contractual arrangements with Ted Forbes, the company’s former president, who has recently retired. Under one agreement, Lane Company will pay the ex-president $7,000 per month for five years if he does not compete with the company during that time in a rival business. Under the other agreement, the company will pay the ex-president $5,000 per month for five years for such advisory services as the company may request from the ex-president.
Lane’s controller asks Reeves whether the balance sheet as of the date the two agreements were signed should show $144,000 in current liabilities and $576,000 in long-term liabilities, or whether the two agreements should be disclosed in a contingencies note to the financial statements. How should Linda Reeves reply to the controller’s questions? Explain.