Describe the effects damage estimates would have on the financial statements of a corporation and a partnership. Support your answer.
If Target got involved in a major lawsuit, then any probable loses that could emanate from the lawsuit are required to be considered as a contingent liability. Based on the guidelines of the FASB, contingent liabilities can get entry into the books of accounts under the condition that the contingency is prospective and that an estimate of the liability can be attained (Schipper, 2007) . Given that all the requirements are met, the potential loss would get recorded in the income statement as well as the balance sheet. The moment Target's legal team attain the estimate, the legal expense account should be debited two million at the same time, the accrued liabilities account should be credited for two million. Provided that the lawsuit gets settled Target is obliged to credit cash and debit accrued liability. The cash flow would not get affected concerning the recording of the contingent liabilities until the liabilities are settled.
Delegate your assignment to our experts and they will do the rest.
How do disclosure requirements differ from a corporation to a partnership and what information is required?
According to the law, privately owned companies are not obliged to disclosing their operating and financial law. Due to that, several companies might choose to release such information on a need to know situation.
Regarding material loss or lawsuit liability contingencies, they operate on the estimated cost and the probability of occurrence. For the probability of occurrence, it has three primary sections, remote, probable, and reasonably possible. Given that the contingency amount has arrived at two million, the amount has to be disclosed, and the nature of the accrual recognized is needed as a full disclosure (Subbarao & Zeghal, 1997) . It mentions that notes need to acknowledge that for the rise in the loss contingency, the major lawsuit and the accrued amounts require listing. If by any chance the loss exceeds the amounts recognized, the company is obliged to disclosing the approximate loss that such an estimate cannot be made. The disclosure category of financial statements should include the potential loss.
Concerning partnerships, it is a requirement that they do not have at least two of the characteristics as follows; centralized management, limited liability, continuity of life, and free transferability of interest. It is mandatory that partnerships have the disclosures below in notes to the financial statements;
The various classes of interests of the members as well as respective rights, privileges and preferences for every class; besides in situations that partnerships fail to report individually amounts for every class in the section of equity of statements of financial position, disclosure of the said amounts.
A representation of any limitation linked to member liability.
The disclosures majorly involve the identities of partners and partnership alongside the information concerning the financial condition of the business and how the activities are.
A balance between securing the information vital to the business and the giving partners access to information is essential for the disclosure of information on the financial conditions and the state of activities of the business (Watchman & Papa, 2019) . The balance of the two gets a better explanation under fiduciary duties context. Partners that are limited lack fiduciary duties of care as well as loyalty to limited partnership base on the limited powers that they can exercise. On the other hand, the fiduciary duties are dependent on the general partners. The duties make general partners the guardians of the information that limited partners have no access to.
Are the shareholders at risk for any personal liability with the company set up as a corporation? Defend your response and support your answer.
No, the shareholders are not under the risk of any personal liability. Corporations involve a group of individuals who are recognized by the law to have a legal authority to act as a single unit. The shareholders are not beneficiaries of any personal liability, given that their liability is restricted to their investment (Macey & O'hara, 2003) . The shareholders do not engage in the entire management of the corporation, but instead, they appoint a board of directors to undertake the management of the corporation in a fiduciary level.
If your company was set up as a partnership, would the partners be at risk for personal liability? Defend your response and support your answer.
Given that Target was set up as a partnership, the personal liability amounts that its partners face would depend on the partnership type the company operates with. For the case of the general partnership, all the owners are personally liable for the debts the company may run into as well as all the legal actions unless stipulated by the law. Thus if the partnership fails to pay the liability from the lawsuit entirely, the partners are held personally liable.
For the case of a limited partnership, it must have at least one limited partner as well as one general partner meaning the general partner would be at the risk of personal liability given that Target was a limited partnership (Greenwood & Empson, 2003) .
Regarding the limited liability partnership, a section or all the partners based on jurisdiction have limited liabilities. In a limited liability partnership, is not held accountable in case of negligence of another partner. None of the partners would be at the risk of personal liability for this type of partnership. For a case involving a particular partner’s misconduct or negligence, that partner would risk personal liability.
References
Greenwood, R., & Empson, L. (2003). The professional partnership: Relic or exemplary form of governance?. Organization studies , 24 (6), 909-933.
Macey, J. R., & O'hara, M. (2003). The corporate governance of banks. Economic policy review , 9 (1).
Schipper, K. (2007). Required disclosures in financial reports. The Accounting Review , 82 (2), 301-326.
Subbarao, A. V., & Zeghal, D. (1997). Human resources information disclosure in annual reports: an international comparison. Journal of Human Resource Costing & Accounting , 2 (2), 53-73.
Watchman, A., & Papa, V. (2019). Need for a Holistic Approach to Enhancing Corporate Disclosure Requirements. Schmalenbach Business Review , 71 (2), 255-261.
