Below are three independent situations. - In August, 2010, a worker was injured

Question

Below are three independent situations. - In August, 2010, a worker was injured in the factory in an accident partially as the result of his own negligence. The worker has sued Wesley 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 $2,400,000 was filed by an author against Greer Co. on October 4, 2010. Greer's legal counsel believes that an unfavorable outcome is probable. A reasonable estimate of the award to the plaintiff is between $600,000 and $1,800,000. No amount within this range is a better estimate of potential damages than any other amount. - Quinn is involved in a pending court case. Peete

Explanation / Answer

1. Wesley Co. should disclose in the notes to the financial statements the existence of a possible contingent liability related to the law suit. The note should indicate the range of the possible loss. The contingent liability should not be accrued because the loss is not probable. 2. The probable award should be accrued by a charge to an estimated loss and a credit to an estimated liability of $600,000. Greer Co. should disclose the following in the notes to the financial statements: the amount of the suit, the nature of the contingency, the reason for the accrual, and the range of the possible loss. The accrual is made because it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The lowest amount of the range of possible losses is used when no amount is a better estimate than any other amount. 3. Quinn should not record the gain contingency until it

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