Question

During 20X1, Violet, Inc. and one of its suppliers became involved in a legal dispute. By the end of 20X1, Violet's attorney's advised Violet that an unfavorable outcome was probable. Further, Violet accountants estimated damages to be as low as $200,000 and as high as $300,000. Violet's insurance policy limits the company's exposure to $50,000 in losses. How much should Violet, Inc. report on its December 20X1 Balance Sheet as a contingent liability?

The answer to this question is not $200,000. I don't know how insurance plays into this?

Answer 1

Violet, Inc. attorney's advised in the case with the suppliers likely to have unfavorable outcome, so the company is advised to consider Maximum damages net of insurance exposure in the losses ie. $300000 - $50000 = $250000, as the contingent liability in its Balance Sheet as on Dec, 20X1 towards the case.