Question

Reeves Co. filed suit against Higgins, Inc., seeking damages for copyright violations. Higgins' legal counsel believes it is probable that Higgins will settle the lawsuit for an estimated amount in the range of $120,000 to $220,000, with all amounts in the range considered equally likely. How should Higgins report this litigation? Multiple Choice As a disclosure only. No liability is reported. As a liability for $170,000 with disclosure of the range. As a liability for $120,000 with disclosure of the range. As a liability for $220,000 with disclosure of the range.

Answer 1

Answer: As a liability for $120,000 with disclosure of the range.

Since it is probable that the loss will occur and the amount of the loss can be reasonably estimated, Higgins, Inc. will record a contingent liability for the damages for copyright violations. As the amount of the loss is estimated to be within a range and where all amounts within the range are considered to be equally likely, the liability will be recorded at the lowest amount in the range and it will also be disclosed in the footnotes to the financial statements. Thus, Higgins will record the liability at $120,000 along with a disclosure.