The following legal claims exist for Huprey Co. Identify the accounting treatmen
ID: 2472234 • Letter: T
Question
The following legal claims exist for Huprey Co. Identify the accounting treatment for each claim as either (a) a liability that is recorded or (b) an item described in notes to its financial statements.
Huprey (defendant) estimates that a pending lawsuit could result in damages of $1,550,000; it is unlikely that the plaintiff will win the case.
Huprey (defendant) estimates that a pending lawsuit could result in damages of $1,550,000; it is unlikely that the plaintiff will win the case.
A. A liability that is recorded. B. An item described in notes to its financial statements.Explanation / Answer
1. B
2. A
3. B
The accounting treatment of contingencies would depend on the expected outcome of the contingency. If it is probable that the contingency would happen ( probability> 0.5), and the amount of the resulting loss can be reasonably estimated, the contingent liability should be recognized as a liability. However, if either the contingency is not probable (though it could occur), or the amount of the contingent loss cannot be reasonably estimated, the contingency should be disclosed in the notes to the financial statements. A contingency which may be only remotely possible need not be disclosed.
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