Sunny DuongACCT 3255/12/14

Individual Research Paper1. 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 450-20-30-1, 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 Infringement17,000,000

Patent Infringement Liability17,000,000

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 ProceedingsIn 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 Infringement1,500,000

Patent Infringement Liability1,500,000

Footnote: Legal ProceedingsIn 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 855-10-25-1 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 ProceedingsIn 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.