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:

$500,000

$750,000

$1,000,000

How to approach this question

US GAAP Rule for Ranges: 1. Best Estimate? Use it. 2. No Best Estimate? Use Minimum. (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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