Question

The following selected circumstances relate to pending lawsuits for Erismus, Inc. Erismus's fiscal year ends on December 31. Financial statements are issued in March 2019. Erismus prepares its financial statements according to U.S. GAAP. Required: Indicate the amount Erismus would record as an asset, liability, or not accrued in the following circumstances. 20 points 1. Erismus is defending against a lawsuit. Erismus's management believes the company has a slightly worse than 50/50 chance of eventually prevailing in court, and that if it loses, the judgment will be $1,620,000. 2. Erismus is defending against a lawsuit. Erismus's management believes it is probable that the company will lose in court. If it loses, management believes that damages could fall anywhere in the range of $2,530,000 to $5,060,000, with any damage in that range equally likely. 3. Erismus is defending against a lawsuit. Erismus's management believes it is probable that the company will lose in court. If it loses, management believes that damages will eventually be $5,250,000, with a present value of $3,675,000. 4. Erismus is a plaintiff in a lawsuit. Erismus's management believes it is probable that the company eventually will prevail in court, and that if it prevails, the judgment will be $1,620,000. 5. Erismus is a plaintiff in a lawsuit. Erismus's management believes it is virtually certain that the company eventually will prevail in court, and that if it prevails, the judgment will be $618,000. eBook Hint Print References Classification Amount 1 2. 3. 5

Answer 1

answer:1 Not accrued

Erismus would not recognize a liability, as U.S. GAAP defines “probable” to be a likelihood of substantially more than “more likely than not”. Rather, Erismus would view the loss as reasonably possible and provide disclosure in a note.

answer: 2 liability - $2,530,000

Erismus would recognize a liability of $2,530,000, as it is probable Erismus will lose in court, and U.S.GAAP requires accrual of the low end of a range of equally likely outcomes. There will also be note disclosure of the lawsuit.

answer: 3 Liability - $5,250,000

Erismus would recognize a liability of $5,250,000, as it is probable that it will lose the case. Under U.S.GAAP companies typically do not discount litigation claims for the time value of money. There will also be note disclosure of the lawsuit.

answer : 4 Not accrued

This is a gain contingency. Gain contingencies are not accrued under U.S. GAAP. A disclosure note is appropriate

answer : 5 Not Accrued

This is a gain contingency. Gain contingencies are not accrued under U.S. GAAP. A disclosure note is appropriate