1. In August, 2014 a worker was injured in the factory in an accident partially
ID: 2472854 • Letter: 1
Question
1. In August, 2014 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 $2,400,000 was filed by an author against Henderson Co. on October 4, 2014. Henderson's legal counsel believes that an unfavorable outcome is probable. A reasonable estimate of the award to the plaintiff is between $800,000 and $1,800,000. 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. Instructions Discuss fully the proper accounting treatment, including amount to be accrued, if any, why an amount would or would not be accrued and any required disclosures, for each situation.
Explanation / Answer
1. As the liability is reasonably possible, and the possible amount may be from $250,000 to $500,000 , then the Accrual for contigent liability will be made for $250,000. A disclosure note will have to be made disclosing that apart from the accrual theer may be additional liability upto another $250,000.
2. The liability is probable here. The range of probable loss available but no amount within this range is a better estimate of potential damages than any other amount So Contingent Liability needs to be recorded with the lowest amount in the range that is $800,000.
3.As the award of damage is probable, the Contingent Gain is to be recorded and the contingent asset amount will be $1,000,000.
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