ExpertMedium1 markMultiple Choice
CPA · Question 38 · Area III: Select Transactions
A company is being sued. It is 'probable' that the company will lose. The estimated loss is a range between $500,000 and $1,000,000, with no amount within the range being more likely than any other. What amount should be accrued?
A company is being sued. It is 'probable' that the company will lose. The estimated loss is a range between $500,000 and $1,000,000, with no amount within the range being more likely than any other. What amount should be accrued?
Answer options:
A.
$500,000
B.
$750,000
C.
$1,000,000
D.
$0
How to approach this question
US GAAP Rule for Ranges: <br/>1. Best Estimate? Use it. <br/>2. No Best Estimate? Use Minimum. <br/>(Note: IFRS uses Midpoint).
Full Answer
A.$500,000✓ Correct
Under ASC 450, if a loss is probable and a range of loss exists with no single best estimate, the minimum amount in the range ($500,000) is accrued. The potential for additional loss up to the maximum is disclosed.
Common mistakes
Using the average/midpoint (IFRS rule).
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