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(Drug Benefits and Post Retirement Liabilities) Delphi Company reduced its other post reitrement benefits by approx 500 million because of a change in the law. The federal government will not reimburse companies for prescription drug benefits that it provides to its employees who are of Medicare age. The reimbursement is 28% of all prescription drug benefits in excess of $250 per person per year, up to a maximum of $1300 per person. A) Identify the process the company would use to identify the liability for post retirement drug benefits. Assume this was done prior to the new federal law. Identify the data the company would need to make the estimate. Identify how the auditor might audit the data. B) Explain how the auditor would verify the $500 million reduction in liability due to the new federal law.
(Contingencies) -An audit client is being sued for $500,000 for discriminatory hiring practices. Indicate the appropriate action the auditor should take for each of the following independent responses to the letter of audit inquiry:
a) The lawyer stated that the client has a "merirorious defense."
b) The lawyer stated that there is only a remote chance that the client will lose. The client did not accrue any contingent loss or disclose this situation.
c) The lawyer state the client will probably lose, and the amount of loss could be anywhere between $250,000 and $500,000, with no amount within that range being more likely than another. The client disclosed this situation but did not accrue a loss.
d) The lawyer state that there is a reasonable possibility that the client will lose. The client disclosed this situation but did not accrue a loss.
e) The lawyer stated that the client will probably losebetween $250,000 and $500,000, but most likely will lose $400,000. The client accrued a $250,000 contingent loss and disclosed the situation.
(Accounting Estimate) An alfalfa co-op has an ageement with its farmers to purcahse alfalfa at a price that is currently above the existing market price. In addition, the co-op has agreed to pay the famers interest at 2% for each month delivery is delayed beyond December 31, 2006. Management expects that at least 14,500 tons will be delivered sometime after the balance sheet date.
a) What factors should be considered in making an estimate of the loss accrual?
b) What information should management disclose in the footnotes to the financial statements concerning this purchase commitment?