In an audit of the Marco Corporation as of December 31, 2019, the following situations exist. No entries have been made in the accounting records in relation to these items.
1. During the year 2019, the Marco Corporation was named as a defendant in a suit for
damages by the Dalton Company for breach of contract. An adverse decision to the
Marco Corporation was rendered and the Dalton Company was awarded $4,000,000
damages. At the time of the audit, the case was under appeal to a higher court.
2. On December 23, 2019, the Marco Corporation declared a common stock dividend of
1,000 shares with a par value of $1,000,000 of its common stock, payable February 2,
2020, to the common stockholders of record December 30, 2019.
3. The Marco Corporation has guaranteed the payment of interest on the 10-year, first
mortgage bonds of the Newart Company, an affiliate. Outstanding bonds of the Newart
Company amount to $5,500,000 with interest payable at 5 percent per annum, due
June 1 and December 1 of each year. The bonds were issued by the Newart Company
on December 1, 2017, and all interest payments have been met by that company with
Required
810Part 5 / COMPLETING THE AUDIT
*Based on AICPA question paper, American Institute of Certified Public Accountants.
the exception of the payment due December 1, 2019. The Marco Corporation states
that it will pay the defaulted interest to the bondholders on January 15, 2020.
a. Define contingent liability.
b. Describe the audit procedures you would use to learn about each of the situations
listed.
c. Describe the nature of the adjusting entries or disclosure, if any, you would make for
each of these situations
