Question

On November 5, 2020, a Dune Corporation truck was in an accident with an auto driven by R. Bell. Dune received notice on January 12, 2021, of a lawsuit for $210,000 in damages for personal injuries suffered by Bell. Dune Corporation's legal counsel believes it is probable that Bell will be awarded an estimated amount in the range between $60,000 and $135,000, and that $90,000 is a better estimate of potential liability than any other amount. Dune's accounting year ends on December 31, and the 2020 financial statements were issued on March 2, 2021. a. What liability should Dune accrue on December 31, 2020? Amount to accrue $ b. How would your answer to (a) change if Dune Corporation's legal counsel believes it is reasonably possible that Bell will be awarded a settlement? Amount to accrue $ c. How would your answer to (a) change if Dune Corporation's legal counsel believes there is only a remote possibility that Bell will be awarded a settlement? Amount to accrue $

Answer 1

Ans: A) Amount to accrue: $ 90000

Reason: As per the applicable IAS:37 " Provision , Contigent Liability and Contingent Assets" when the amount of outflow is reasonable certain than a provision should be recorded based on the most reasonable estimate of Outflow amount. IN this case as the legal counsel has predicted there will be a outflow so the loss should be accrued with the most reasonable estimate (i.e. 90000 $)

Ans: B) Amount to accrue: $ 135000

Reason: As per the GAAP Principle. all the losses and expenses are to be recognised in the year when there is reasonable cetainity there will be a outflo of resource to meet up the obligation. As there is reasonable certainity there will be a outflow than entire expected loss should be recognised as per the applicable GAAP.

Ans: C) Amount to accrue: Nil

Reason: As per the applicable IAS:37 " Provision , Contigent Liability and Contingent Assets" when the amount of outflow is remote than no provision should be recognised , only the facts should be stated in the notes to account under the head of Contingent Liability.