Wooten Co. is being sued for illness caused to local residents as a result of negligence on the company's part in permitting the local residents to be exposed to highly toxic chemicals from its plant. Wooten's lawyer states that it is probable that Wooten will lose the suit and be found liable for a judgment costing Wooten anywhere from $1,800,000 to $9,000,000. However, the lawyer states that the most probable cost is $5,400,000. As a result of the above facts, Wooten should accrue
A) a loss contingency of $1,800,000 and disclose an additional contingency of up to $7,200,000.
B) a loss contingency of $5,400,000 and disclose an additional contingency of up to $3,600,000.
C) a loss contingency of $5,400,000 but not disclose any additional contingency.
D) no loss contingency but disclose a contingency of $1,800,000 to $9,000,000.
In case of contigent liability if liability is probable and amount can be estimated then it should be recorded in the books of accounts hence in this case it is probable that Wooten will lose the suit hence contigent liability should be recorded in the books of accounts.
Amount which should be recorded in the books is the amount which is most probable cost here in this case $5,400,000 and additional cost must be shown as disclouse.
Hence answer to this question is B) A loss contingency of $5,400,000 and disclose an additional contingency of up to $3,600,000.
Wooten Co. is being sued for illness caused to local residents as a result of negligence...
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