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Rakhi Vasavada
Rakhi Vasavada, Financial and Legal Consultant
Category: Finance
Satisfied Customers: 4434
Experience:  Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
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2.(TCO D) Below are three independent situations. - In August,

Customer Question

2.(TCO D) Below are three independent situations.
- In August, 2010, a worker was injured in the factory in an accident partially as the result of his own negligence. The worker has sued Wesley 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 Greer Co. on October 4, 2010. Greer's legal counsel believes that an unfavorable outcome is probable. A reasonable estimate of the award to the plaintiff is between $600,000 and $1,800,000. No amount within this range is a better estimate of potential damages than any other amount.
- Quinn is involved in a pending court case. Peete's lawyers believe it is probable that Quinn 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.
Submitted: 3 years ago.
Category: Finance
Expert:  Rakhi Vasavada replied 3 years ago.

rakhivasavada :

Dear Friend, Hello and welcome..

rakhivasavada :

I believe these are all real life situations.

rakhivasavada :

In the first case the possible settlement amount should be entered as a contingent liability in my opinion. A contingent liability is a potential loss that may occur at some point in the future, once various uncertainties have been resolved. A contingent liability is not yet an actual, confirmed liability.

rakhivasavada :

Record a contingent liability when it is probable that the loss will occur, and you can reasonably estimate the amount of the loss. If you can only estimate a range of possible amounts, then record that amount in the range that appears to be a better estimate than any other amount; Disclose the existence of the contingent liability in the notes accompanying the financial statements if the liability is reasonably possible but not probable, or if the liability is probable, but you cannot estimate the amount

rakhivasavada :

The second instance too is a case of contingent liability.

rakhivasavada :

However, here, the company has arrived at "reasonable amount:. So, here too contingent liability would be recorded in the similar fashion, disclosed in the foot notes and recorded in the following manner.

rakhivasavada :

When liability is contingent

Legal Expense / settlement A/C DR
To Accrued Liabilities

rakhivasavada :

When it is actually paid out,

rakhivasavada :

Accrued Liabilities A/c DR
To Cash

rakhivasavada :

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rakhivasavada :

Are you there friend ?