Question

Problem 1

Nevue Inc. has been sued for following three alleged infringements of law:

1. (1) Unauthorized use of a trademark; the claim is for $100 million

2. (2) Nonpayment of end-of-service severance pay and gratuity to 5,000 employees

   who were terminated without Nevue Inc. giving any reason; the class action

   lawsuit is claiming $3 million

3. (3) Unlawful environmental damage for dumping waste in the river near its factory;

   environmentalists are claiming unspecified damages as cleanup costs

Legal counsel is of the opinion that not all the legal cases are tenable in law and has communicated to Nevue Inc. this assessment of the three lawsuits:

Lawsuit 1:  the chances of this lawsuit are remote.

Lawsuit 2: It is probable that Nevue Inc. would have to pay the displaced employees, but the best estimate of the amount that would be payable if the plaintiff succeeds against the entity is $2 million.

Lawsuit 3: There is no current law that would compel the entity to pay for such damages. There is a case for constructive obligation, but the amount of damages cannot be estimated with any reliability.

Required –

What should be the provision that Nevue Inc. should recognize or the contingent liability that it should disclose in each of the lawsuits, based on the assessments of its legal counsel?

Answer 1

The provision for the Contingent liability that Nevue Inc. should recognize in each of the lawsuits,

based on the assessments of its legal counsel are:

Lawsuit 1:  the chances of this lawsuit going in favor are remote. So, Nevue Inc. has to made provision

for the entire claim amount ie. $100 million.

Lawsuit 2: Here Nevue Inc. would have to pay the displaced employees, thus the company have to

provide for the best estimate of the amount that would be payable ie. $2 million.

Lawsuit 3: Due to lack of any law concerning the case that compel the entity to pay any damages. So,

the company is not in obligation to make any provision for any damages and no provision is required.