Question

GK, Inc. has the following outstanding litigation claims against it:
1. A claim of $100,000. GK thinks it is probable it will lose the claim, and estimates the loss at $75,000 if it occurs.
2. A claim of $50,000. GK thinks it is probable it will lose the claim, but cannot estimate the amount of loss.
3. A claim of $10,000. GK thinks it is reasonably possible it will lose the claim, and estimates the loss at $8,000 if it occurs.
GK should accrue a contingent liability of:

Answer 1

GK should accrue a contingent liability of: $75,000

Explanation:- There are three possible scenarios for contingent liabilities, all of which involve different accounting transactions. They are:

• Recordation. Record a contingent liability when it is probable that a loss will occur, and you can reasonably estimate the amount of the loss.

• Disclosure. Disclose the existence of a contingent liability in the notes accompanying the financial statements if the liability is reasonably possible but not probable, or if the liability is probable, but you cannot estimate the amount. “Reasonably possible” means that the chance of the event occurring is more than remote but less than likely.

• No treatment. Do not record or disclose a contingent liability if the probability of its occurrence is remote.