Aaron Ltd. Manufactures and sells home appliances. While preparing December 31, 2020, financial statements for Aaron Ltd., the following information was found concerning contingencies and possible adjustments to liabilities. Aaron Ltd. 2020 financial statements were issued on April 1, 2021.

1. On November 12, 2020, a former employee filed a lawsuit against Aaron Ltd. alleging age discrimination and asking for damages of $850,000. At December 31, 2020, Aaron Ltd.'s attorney indicated that the chances of losing the lawsuit were possible but not probable. On March 5, 2021, Aaron Ltd. agreed to pay the former employee $225,000 in return for withdrawing the lawsuit.
2. Aaron Ltd. believes there is a likelihood a service provider may claim that it has been undercharged for outsourcing a processing service based on verbal signs of the company's interpretation of a negotiated rate. The service provider has not yet made a claim for extra fees as of April 2021, but Aaron Ltd. believes it will. Aaron Ltd.'s accountants and legal counsel feels the charges were acceptable but that if an assessment is made, there is a reasonable possibility that subsequent court action would cause an additional tax liability of $85,000.
3. Aaron Ltd. grants a two-year warranty for each coffee maker sold. Experience shows that the costs of fulfilling warranties are roughly 3% of sales. In 2020, sales of coffee makers totaled $23,100,000. 2020 expenditures for warranty repair costs were $188,000 related to 2020 sales and $219,000 related to 2019 sales. The January 1, 2020, balance of the warranty liability account was $250,000.
4. Aaron Ltd. is the plaintiff in a $700,000 lawsuit filed in 2019 against Brown's LLC for failing to deliver on contracts for produce. The suit is in final appeal. Legal counsel advises that it is probable that Aaron Ltd. will prevail and will be awarded $300,000 (considered a material amount).

Required:

1. Determine the appropriate reporting for each situation. Briefly explain your reasoning.

2. Prepare any necessary journal entries and state whether a disclosure note is needed.

Answer rating: 100% (QA)

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