ExpertMedium1 markMultiple Choice
CPA · Question 37 · Area III: Select Transactions
A company is being sued. Legal counsel believes it is 'probable' the company will lose and estimates the loss will be between $100,000 and $500,000, with no amount within the range more likely than any other. What amount should be accrued?
A company is being sued. Legal counsel believes it is 'probable' the company will lose and estimates the loss will be between $100,000 and $500,000, with no amount within the range more likely than any other. What amount should be accrued?
Answer options:
A.
$100,000
B.
$300,000
C.
$500,000
D.
$0
How to approach this question
Rule for Contingencies (US GAAP): If Probable + Estimable Range -> Accrue 'Best Estimate'. If no best estimate -> Accrue Minimum (Low end). Disclose the range.
Full Answer
A.$100,000✓ Correct
A
ASC 450: When a loss is probable and a range exists with no best estimate, accrue the minimum amount in the range ($100,000). Note: IFRS would accrue the midpoint.
Common mistakes
Using the average/midpoint (IFRS rule).
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