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:

Accrue $100,000

Accrue $150,000

Disclose in notes only

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

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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