contestada

For each separate situation, indicate whether Cruz Company should (a) record a liability, (b) disclose in
notes, or (c) have no disclosure.
1. Cruz Company guarantees the $100,000 debt of a supplier. It is not probable that the supplier will
default on the debt.
2. A disgruntled employee is suing Cruz Company. Legal advisers believe that the company will likely
need to pay damages, but the amount cannot be reasonably estimated.

Respuesta :

anthougo

Answer:

Cruz Company

Indicating whether to (a) record a liability, (b) disclose in notes, or (c) have no disclosure.

Transaction                                                        Remark

1.  Guarantee of supplier's debt                  (c) have no disclosure

2. Damages for disgruntled employee      (b) disclose in notes

Explanation:

When it is not probable that the supplier whose debt is guaranteed by Cruz will default on the debt, there is no need to make a disclosure since probable liability is not accruing to Cruz.  But with the legal case of a disgruntled employee, Cruz should disclose the information in a note.  It can only be recorded as a liability when the amount of the damages can be reasonably estimated.