Problem 13-6

a. This is a loss contingency. Eastern can use the information occurring after the
end of the year in determining appropriate disclosure. It is unlikely that Eastern
would choose to accrue the $122 million loss because the judgment will be
appealed and that outcome is uncertain. A disclosure note is appropriate:

_______________________________
Note X: Contingency
In a lawsuit resulting from a dispute with a supplier, a judgment was rendered
against Eastern Manufacturing Corporation in the amount of $107 million plus
interest, a total of $122 million at February 3, 2012. Eastern plans to appeal the
judgment. While management and legal counsel are presently unable to predict
the outcome or to estimate the amount of any liability the company may have
with respect to this lawsuit, it is not expected that this matter will have a material
adverse effect on the company.

b. This is a loss contingency. Eastern can use the information occurring after the
end of the year in determining appropriate disclosure. Eastern should accrue the
$140 million loss because the ultimate outcome appears settled and the loss is
probable.

Loss – litigation .......................................... 140,000,000

Liability - litigation ................................. 140,000,000

A disclosure note also is appropriate:

_________________________________
Notes: Litigation
In November 2010, the State of Nevada filed suit against the Company, seeking
civil penalties and injunctive relief for violations of environmental laws
regulating hazardous waste. On January 12, 2012, the Company announced that
it had reached a settlement with state authorities on this matter. Based upon
discussions with legal counsel, the Company has accrued and charged to
operations in 2011, $140 million to cover the anticipated cost of all violations.
The Company believes that the ultimate settlement of this claim will not have a
material adverse effect on the Company's financial position.
Problem 13-6 (concluded)
c. This is a gain contingency. Gain contingencies are not accrued even if the gain
is probable and reasonably estimable. The gain should be recognized only when
realized.

Though gain contingencies are not recorded in the accounts, they should be
disclosed in notes to the financial statements.

_______________________________
Note X: Contingency
Eastern is the plaintiff in a pending lawsuit filed against United Steel for damages
due to lost profits from rejected contracts and for unpaid receivables. The case
is in final appeal. No amount has been accrued in the financial statements for
possible collection of any claims in this litigation.

d. No disclosure is required because an EPA claim is as yet unasserted, and an

assessment is not probable. Even if an unfavorable outcome is thought to be
probable in the event of an assessment and the amount is estimable, disclosure
is not required unless an unasserted claim is probable.
Exercise 14-2
1. Maturity Interest paid Stated rate Effective (market) rate
10 years annually 10% 12%
Interest $100,000 ¥ x 5.65022 * = $565,022
Principal $1,000,000 x 0.32197 ** = 321,970
Present value (price) of the bonds $886,992
¥ 10% x $1,000,000
* present value of an ordinary annuity of $1: n=10, i=12% (Table 4)
** present value of $1: n=10, i=12% (Table 2)
2. Maturity Interest paid Stated rate Effective (market) rate
10 years semiannually 10% 12%
Interest $50,000 ¥ x 11.46992 * = $573,496
Principal $1,000,000 x 0.31180 ** = 311,800
Present value (price) of the bonds $885,296
¥ 5% x $1,000,000
* present value of an ordinary annuity of $1: n=20, i=6% (Table 4)
** present value of $1: n=20, i=6% (Table 2)
3. Maturity Interest paid Stated rate Effective (market) rate
10 years semiannually 12% 10%
Interest $60,000 ¥ x *
12.46221 = $ 747,733
Principal $1,000,000 x 0.37689 ** = 376,890
Present value (price) of the bonds $1,124,623
¥ 6% x $1,000,000
* present value of an ordinary annuity of $1: n=20, i=5% (Table 4)
** present value of $1: n=20, i=5% (Table 2)

4. Maturity Interest paid Stated rate Effective (market) rate

20 years semiannually 12% 10%
Interest $60,000 ¥ x 17.15909 * = $1,029,545
Principal $1,000,000 x 0.14205 ** = 142,050
Present value (price) of the bonds $1,171,595
¥ 6% x $1,000,000
* present value of an ordinary annuity of $1: n=40, i=5% (Table 4)
** present value of $1: n=40, i=5% (Table 2)
Exercise 14-2 (concluded)
5. Maturity Interest paid Stated rate Effective (market) rate
20 years semiannually 12% 12%
Interest $60,000 ¥ x *
15.04630 = $902,778
Principal $1,000,000 x 0.09722 ** = 97,220
Present value (price) of the bonds $999,998

actually, $1,000,000 if PV table factors were not rounded

¥ 6% x $1,000,000
* present value of an ordinary annuity of $1: n=40, i=6% (Table 4)
** present value of $1: n=40, i=6% (Table 2)