Sunny Duong

ACCT 325
5/12/14
Individual Research Paper
1. What amount, if any, should Company M record as a liability in its December
31, 2007 financial statements? Provide support and citation from the ASC. If a
liability is recorded, provide the journal entry.

In May 2007, W Inc. filed a patent infringement lawsuit against M

International. The issue here is whether or not Company M should record a
liability in their financial statements ending in December 31, 2007 and how
much. According to ASC 450-20-25-2, a contingency loss is recorded when it
is probable that a liability had been incurred and that the amount of loss
can be reasonably determined. In Company Ms case there is probable loss
because they cannot guarantee that the lawsuit will fail. Furthermore, there
is an estimated loss of $15 to $20 million, with $17 million being the most
likely.
Additionally, ASC 450-20-55-11 states that accruals may be
appropriate for litigation, claims, or assessments whose underlying cause is
an event occurring on or before the date of an entitys financial statements.
This further supports that Company M has to record a contingency loss
because the lawsuit occurs before the date of their financial statements.
Therefore, Company M must record a contingency loss, which brings us to
our next issuehow much should be recorded? According to ASC 450-20-301, if some amount within a range of loss appears at the time to be a better
estimate than any other amount within the range, that amount shall be
accrued. Company M will record $17 million as a contingency loss because

it is the most likely amount within their ranged estimate. The journal entry is
as follows:
Estimated Loss from Patent Infringement

17,000,00
0

Patent Infringement
Liability

17,000,0
00

2. Draft a footnote to its financial statements as of December 31, 2007. This

footnote will differ depending upon whether a liability is recorded.

Legal Proceedings
In May 2007, Company W filed a lawsuit against us for patent
infringement. They argue that we have violated their patent rights by
copying intellectual property that is exclusively owned by them. We dispute
the allegations of this case and will vigorously defend ourselves in court.
Although our trial would not take place until September 2009, management
has estimated that there would be a probable loss of $15-20 million.
Additionally, they concluded that $17 million will be the most likely amount
of loss within this range. We have accounted for this in the liability section of
our financial statements. Furthermore, we plan to appeal file an appeal to the
Court of Appeals in the event that we are ordered to pay for these
allegations.
3. Should Company M adjust its liability on its financial statements dated
December 31, 2009? If so, how should this adjustment be recorded, and how
should it be recorded? Provide support and citation from the ASC. If an
adjustment is recorded, provide the journal entry. Draft a footnote to the
financial statements as of December 31, 2009.

In September 2009, a jury trial ruled in favor of Company W and

ordered Company M to pay $18.5 million to W. Company M needs to adjust
its liability entries for their 2009 financial statements because they were
ordered to pay an amount different to the estimated $17 million. According
to ASC 250-10-45-17, the litigation settlement is considered a change in
estimate because an actual $18.5 million judgment is different than the
original estimate of $17 million. This is a change in estimate that shall not
be accounted for by restating or retrospectively adjusting amounts reported
in financial statements. In other words, we do not adjust the liability of $17
million but instead add the remaining liability not accounted for. As a result,
the journal entry is as follows:
Estimated Loss from Patent Infringement

1,500,0
00

Patent Infringement Liability

1,500,000

Footnote: Legal Proceedings

In May 2007, Company W filed a patent infringement against us which
we disputed. Management decided that $17 million would be the most likely
lost within our estimated range of probable loss. However, when a verdict
was reached in September 2009 in Company Ws favor, we were ordered to
pay them $18.5 million. Because we have already recognized a loss of $17
million, we recorded another loss of $1.5 million which accounts for the
overall $18.5 million in losses from the litigation. In response to this however,
we filed to the Court of the Appeals in November 2009 for a new trial to
disprove the allegations and clearing our name.

4. Should Company M adjust its liability on its financial statements dated

December 31, 2010, assuming the financial statements are issued on January
30, 2011? Provide support and citation from the ASC. If so, how should the
adjustment be recorded? Provide the journal entry. Draft a footnote to the
financial statements, dated December 31, 2010.

In December 2010, the litigation claims were reversed in Company Ms

favor and they no longer have to pay the $18.5 million settlement to
Company W. Although this may appear to be a subsequent change, ASC 85510-25-1 defines subsequent changes as events that provide additional
evidence about conditions that existed at the date of the balance sheet but
before the issuance of financial statements. In Company Ms case, the case
was overturned in the month of December but the balance sheet date is at
the end of December 2010 whereas the financial statements will be issued in
January 2011. The overturned settlement would have to have occurred
between December 31st and January 30th in order to be considered a
subsequent change for this years financial statements. Therefore, Company
M should not adjust its liabilities for financial statements ending in December
31st, 2010.
Footnote: Legal Proceedings
In May 2007, Company W filed a patent infringement lawsuit against
us, which we originally estimated and recorded as a loss of $17. Because of
the probable loss and estimable amount, we have recorded this liability as a
contingency loss. Unfortunately, we lost the case in September of 2009 and
were ordered to pay $18.5 million instead of $17 million. We have made the
necessary adjustments for the change in estimates. However, we appealed
to the Court of Appeals in November 2009 and overturned the verdict in

December 2010. Because this event occurred outside the period of time
defined for subsequent changes, we will not adjust our liability accounts for
this years financial statements. Instead, this amount will be accounted for in
next years financial statements. After we overturned their charges,
Company W petitioned for a re-hearing on January 6, 2011. Top management
has decided that a loss is estimable but not probable because the same
panel of judges that overturned their verdict will preside over the rehearing.
Therefore, we will not record any contingency losses at this point in time.