Question

S11-12 Accounting treatment for contingencies Freeman Motors, a motorcycle manufacturer, had the following contingencies. a. Freeman estimates that it is reasonably possible but not likely that it will lose a current lawsuit. Freeman's attorneys estimate the potential loss will be $4,500,000. b. Freeman received notice that it was being sued. Freeman considers this lawsuit to be frivolous. I c. Freeman is currently the defendant in a lawsuit. Freeman believes it is likely that it will lose the lawsuit and estimates the damages to be paid will be $75,000. Determine the appropriate accounting treatment for each of the situations Freeman is facing.

Answer 1

Accounting treatment for the following situation given below: a. In this situation there are very less chances of losing the lawsuit and the loss of losing the lawsuit has been estimated. Since there are less chances of losing than winning, so there is no need to record the loss as expenses. But it will be diregard of the standard if the situation has not been described to the users of the financial statements. Hence the situation shall be described in the note to the financial statement. b. In this situation, freeman received notice to be sued but still not been sued and also the observations of the notice are frivolous as per the freeman motors, hence there is no need to disclose the situation as per the standard. C. There are very high chances of loosing the lawsuit and the damages it can cause has been estimated it's better to record the estimated damages as an expense and create the liability, so as to give true and fair view of the financial statements.

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