2 Accounting treatment for contingenci vze the following independent situations

Question

2 Accounting treatment for contingenci vze the following independent situations E11-23 A sl1- r Company is being sued by a former employee. Weaver believes that there ote chance that the employee will win. The employee is suing Weaver for is a rem damages of $40,000. Gulf Oil Refinery had a gas explosion on one of its oil rigs. Gulf believes is like the future due to the gas explosion. Gulf cannot estimate the amount of the damages. b. ly that it will have to pay environmental clean-up costs and damages in c. Lawson Enterprises estimates that it will have to pay $75,000 in warranty repairs next year Determine how each contingency should be treated.

Explanation / Answer

Contingencies have to be provided for if there is reasonable chance for the company to incur he liability in the near future. However, if the condition of incurring the liability exists before the preperation of the financial statements, then they should be provided for especially if there is substantial costs to be incurred and they can be estimated.
Case a) Even though there is remote chance of incurring the liability, it is PRUDENT to provide for the liability in the FOOTNOTES of the financial statements.
Case b) Since the damages cannot be estimated, reasonable estimation should be made and the same is to be recognised in the footnotes of the financial statements
Case c) Since the liability is definite, it should be recognised as a liability

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