ExpertHard1 markMultiple Choice
CPA · Question 17 · Area III: Select Transactions
Westfield Corp. has a contingent liability related to a lawsuit. The company's legal counsel believes there is a 60% probability that Westfield will lose the case and pay damages of $800,000. There is a 30% probability of paying $400,000, and a 10% probability of paying nothing.<br/><br/>Under ASC 450, how should Westfield account for this contingency?
Westfield Corp. has a contingent liability related to a lawsuit. The company's legal counsel believes there is a 60% probability that Westfield will lose the case and pay damages of $800,000. There is a 30% probability of paying $400,000, and a 10% probability of paying nothing.<br/><br/>Under ASC 450, how should Westfield account for this contingency?
Answer options:
A.
No accrual required; disclose only
B.
Accrue $680,000 liability (expected value)
C.
Accrue $800,000 liability and disclose the contingency
D.
Accrue $400,000 liability (minimum amount)
How to approach this question
Apply ASC 450 criteria: if loss is probable (>50%) and amount can be reasonably estimated, accrue the liability. Use the most likely amount when probabilities are given. Always disclose material contingencies.
Full Answer
C.Accrue $800,000 liability and disclose the contingency✓ Correct
Accrue $800,000 liability and disclose the contingency
ASC 450-20-25-2 requires accrual when a loss is probable and the amount can be reasonably estimated. 'Probable' means likely to occur (>50%). When multiple outcomes are possible, accrue the most likely amount. The $800,000 loss has the highest individual probability (60%).
Common mistakes
Using expected value instead of most likely amount, treating 60% as 'reasonably possible' instead of 'probable', or accruing the minimum amount
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