ExpertMedium1 markMultiple Choice
CPA · Question 37 · Area III: Select Transactions
Legal counsel informs a company that a loss from a lawsuit is 'reasonably possible' and estimates the loss to be between $100,000 and $200,000. How should this be reported?
Legal counsel informs a company that a loss from a lawsuit is 'reasonably possible' and estimates the loss to be between $100,000 and $200,000. How should this be reported?
Answer options:
A.
Accrue $100,000
B.
Accrue $150,000
C.
Disclose in notes only
D.
No disclosure or accrual
How to approach this question
1. Probability: Probable vs Reasonably Possible vs Remote. <br/>2. Estimability. <br/>Here: Reasonably Possible -> Disclose only. (Accrual requires 'Probable' AND 'Estimable').
Full Answer
C.Disclose in notes only✓ Correct
C
Contingent losses are accrued only if they are BOTH probable and reasonably estimable. Since this is only 'reasonably possible', it should be disclosed in the notes, but no liability is recorded.
Common mistakes
Accruing the minimum amount (that's for Probable ranges).
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