PA10-5 Determining Financial Statement Reporting of Contingent Liabilities Macro

Question

PA10-5 Determining Financial Statement Reporting of Contingent Liabilities Macromedia, Inc., is the original maker of shockwave and flash technologies. One of its annual reports indicated that a lawsuit had been filed against the company and five of its former officers for securities fraud in connection with allegedly making false or misleading statements about its financial results. The lawsuit was settled out of court, as described in the following note: LO 10-4 media, Inc. Legal The settlement amount was $48.0 million, of which approximately $19.5 million was paid by insurance. As a result, the Company recorded a $28.5 million charge as a component of other income (expense) in its consolidated statements of operations Required: Macromedia did not record a liability or include a note to the financial statements prior to set- tling the lawsuit. Which of the following best describes the estimated likelihood of loss prior to settling the lawsuit: (a) probable, (b) reasonably possible, or (c) remote?

Explanation / Answer

This would be termed as being reasonable probable since the outcome of this liability was not known and there was a reasonable chance of paying the party.

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