The following selected circumstances relate to pending lawsuits for Erismus, Inc

Question

The following selected circumstances relate to pending lawsuits for Erismus, Inc. Erismus’s fiscal year ends on December 31. Financial statements are issued in March 2017. Erismus prepares its financial statements according to U.S. GAAP

Required: Indicate the amount Erismus would record as an asset, liability, or not accrued in the following circumstances.

1. Erismus is defending against a lawsuit. Erismus's management believes the company has a slightly worse than 50/50 chance of eventually prevailing in court, and that if it loses, the judgment will be $1,000,000.

2. Erismus is defending against a lawsuit. Erismus's management believes it is probable that the company will lose in court. If it loses, management believes that damages could fall anywhere in the range of $2,000,000 to $4,000,000, with any damage in that range equally likely.

3. Erismus is defending against a lawsuit. Erismus's management believes it is probable that the company will lose in court. If it loses, management believes that damages will eventually be $5,000,000, with a present value of $3,500,000.

4. Erismus is a plaintiff in a lawsuit. Erismus's management believes it is probable that the company eventually will prevail in court, and that if it prevails, the judgment will be $1,000,000.

5. Erismus is a plaintiff in a lawsuit. Erismus’s management believes it is virtually certain that the company eventually will prevail in court, and that if it prevails, the judgment will be $500,000.

Explanation / Answer

Answers:

1. Since, case is on 50-50 position, that neither a winning position is certain nor the lossing of case. But according to principles of accounts., provision of losses shall be maitained or diclose in books when there is possible probablility. hence in given case, the amount of damage shall be disclosed as contingent liability in notes to accounts.

2. Company would recognize a liability of $2,000,000, as its probable it will lose in court & US GAAP requires accrual of low end of range of equally likely outcomes & a disclosure note of lawsuit. Therefore, the company shall make provision of above amount in the balance sheet.

3) Company would records a liability of $5,000,000 because the loss is "probable" & the discount claim is not recognized under GAAP as TVM & a disclosure note is done. Hence, the provision shall be disclosed in balance sheet.

4) Company would records a disclosure note in the footnotes of accounts as it is contingent asset or gain in future.

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