Week 3 Project

Requirements

The items 1 through 6 below represent various commitments and contingencies of Martin Inc. at December 31, 2011 and events subsequent to December 31, 2011, but prior to the issuance of the 2011 financial statements. Martin Inc. is preparing its financial statements for the year ended December 31, 2011. 1. On December 1, 2011, Martin was awarded damages of $75,000 in a patent infringement suit it brought against a competitor. The defendant did not appeal the verdict, and payment was received in January 2012. FASB Codification 605-10-25 This item should be accrued as accrued revenue. The recognition of revenue and gains of an entity during a period involves consideration of the following two factors, with sometimes one and sometimes the other being the more important consideration: Being realized or realizable. Revenue and gains generally are not recognized until realized or realizable. Paragraph 83(a) of FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises, states that revenue and gains are realized when products (goods or services), merchandise, or other assets are exchanged for cash or claims to cash. That paragraph states that revenue and gains are realizable when related assets received or held are readily convertible to known amounts of cash or claims to cash. 2. A former employee of Martin has brought a wrongful-dismissal suit against Martin. Martins lawyers believe the suit to be without merit. FASB Codification 450-20-25-2 This item should neither be accrued nor disclosed As this does not pertain to current period & also it cannot be reasonably estimated. An estimated loss from a loss contingency shall be accrued by a charge to income if both of the following conditions are met: a. Information available before the financial statements are issued or are available to be issued (as discussed in Section 855-10-25) indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements. Date of the financial statements means the end of the most recent accounting period for which financial statements are being presented. It is implicit

in this condition that it must be probable that one or more future events will occur confirming the fact of the loss. 3. At December 31, 2011 Martin had outstanding purchase orders in the ordinary course of business for purchase of a raw material to be used in its manufacturing process. The market price is currently higher than the purchase price and is not anticipated to change within the next year. FASB Codification 820-10-50 A reporting entity shall disclose information that helps users of its financial statements assess both of the following: For assets and liabilities that are measured at fair value on a recurring or nonrecurring basis in the statement of financial position after initial recognition, the valuation techniques and inputs used to develop those measurements This item should be disclosed, though not accrued as it would affect next accounting period.

4. A government contract completed during 2011 is subject to renegotiation. Although

Martin estimates that it is reasonably possible that a refund of approximately $200,000-$300,000 may be required by the government, it does not wish to publicize this possibility. FASB Codification 450-20-25-2 This item should be accrued This relates to current period, and can be reasonably estimated.

5. Martin has been notified by a governmental agency that it will be held responsible for the cleanup of toxic materials at site where Martin formerly conducted operations. Martin estimates that it is probable that its share of remedial action will be approximately $500,000. FASB Codification 450-20-25-6 & 450-20-50-3 - This item should be disclosed only, and not accrued This is because the loss contingency did not occur on the date of financial statements, and do not pertain to the current or prior period, however there is a reasonable possibility of the occurrence of the loss.

6. On January 5, 2012, Martin redeemed its outstanding bonds and issued new bonds

with a lower rate of interest. The reacquisition price was in excess of the carrying amount of the bonds. FASB Codification 470-10-50-1 This item should be disclosed.