Question

est after nine months. E9-9 LO9-4 Reporting Contingent Liabilities James Soda is a regional soda manufacturer. James is currently facing three lawsuits, summarized below: a. A customer is suing James for $1 million because he claims to have found a piece of glass in his soda. Management deems the probability that James will lose the lawsuit and have to pay $1 million as rea- sonably possible.

Answer 1

Contingent liabilities are possible obligations whose existence will be confirmed by uncertain future events that are not wholly within the control of the entity. An example is litigation against the entity when it is uncertain whether the entity has committed an act of wrongdoing and when it is not probable that settlement will be needed.

a) In the first case, contingent liability is both probable and the amount can be estimated.So $1 million should be recorded as an expense or loss on the income statement, and 2) a liability on the balance sheet.Management should also describe the liability in the footnotes that accompany the financial statements.

b)  If you can only estimate a range of possible amounts, then record that amount in the range that appears to be a better estimate than any other amount; if no amount is better, then record the lowest amount in the range.So the liability should be recorded at $100000 and the range of 100000-500000 should be disclosed in footnotes.

c) In third case management deems the probability of James to lose the lawsuit and pay $300000 as remote.No treatment in books of accounts is required when probability of its occurrence is remote.