Question

E9-9 (Static) Reporting Contingent Liabilities LO 9-4 James Soda is a regional soda manufacturer. James is currently facing three lawsuits, summarized below: Required: How should James report each of the lawsuits in its financial statements and footnotes? Probability of future economic sacrifice A customer is suing James for $1 million because he claims to have found a piece of glass in his soda. Management deems the 4. probability that James will lose the lawsuit and have to pay $1 million as reasonably possible An employee is suing James for $500,000 for an injury she incurred in the parking lot while walking to work. Management deems the probability that James will lose the lawsuit as probable but estimates that a reasonable payout will be $100,000, not $500,000. A customer is suing James for $300,000 because her last name is James and she claims James stole her name. Management deems the probability that James will lose the lawsuit and have to pay $300,000 as remote.

Answer 1

a) It is probable in nature as per GAAP principles, Hence as it is more probable to occur and hence loss contingencies are shown in the income statement.hence it should be shown in income statement of an amount $1000000.

b) This lawsuit is possible in nature and and hence they should be shown in the footnotes of the financial statements as the investors are to be provided this information about the company.

c) This lawsuit probability of occuring is remote in nature and hence as per GAAP , there is no need to show about this in the financial statement anywhere.