Below are three independent situations. 1. In August, 2018 a worker was injured

Question

Below are three independent situations.

1. In August, 2018 a worker was injured in the factory in an accident partially the result of his own negligence. The worker has sued Barkley Co. for $800,000. Counsel believes it is reasonably possible that the outcome of the suit will be unfavorable and that the settlement would cost the company from $250,000 to $500,000.

2. A suit for breach of contract seeking damages of $3,000,000 was filed by an author against Henderson Co. on October 4, 2018. Henderson's legal counsel believes that an unfavorable outcome is probable. A reasonable estimate of the award to the plaintiff is between $1,000,000 and $2,250,000. No amount within this range is a better estimate of potential damages than any other amount.

3. Kroft is involved in a pending court case. Kroft’s lawyers believe it is probable that Kroft will be awarded damages of $1,000,000.

Should you accrue a liabiity in each situation?

Explanation / Answer

Answer 1. The company should disclose the possible existence of contingent liability of the law suit in the notes of the financial statements. It also disclosed the range of $250,000 to $500,000 in the notes. The contingent liability is not accrued since it is not certain that the loss is probable or certain. Answer 2. Henderson Company should create contingent Liability of $1,625,000 (Average of $1,000,000 and $2,250,000 range of expected loss) becoase it is certain that unfavourable outcome will come and company had to pay the damages to the author. Answer 3. Contingent Assets are neither accrued nor disclosed in the Financial Statements. So, Kroft should not record the contingent Assets. Contingent Asset can be disclosed because its outcome is probable.

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