Question 5 . Below are three independent situations. In August, 2004 a worker wa

Question

Question 5.

Below are three independent situations.

In August, 2004 a worker was injured in the factory in an accident partially the result

of his own negligence. The worker has sued Rooney 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.

A suit for breach of contract seeking damages of $2,000,000 was filed by an author against Dane Co. on October 4, 2004. Dane's legal counsel believes that an unfavorable outcome is probable. A reasonable estimate of the award to the plaintiff is between $500,000 and $1,500,000. No amount within this range is a better estimate of potential damages than any other amount.

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

Instructions

Discuss the proper accounting treatment, including any required disclosures, for each situation. Give the rationale for your answers.

Explanation / Answer

As this amount is reasonably possible but not probable, it should be disclosed, but not accrued.



2. As this is probable (the threshold for requiring a charge to income), an accrual must be recognized in the current period. As the amount is estimatable and no award is a better estimate, the low end of the range ($600,000) would need to be accrued for the period. If material, specific disclosure should be made.



3. As this is a gain contingency, it should not be accrued as income or disclosed.

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.