Contingency Paper 1

A liability arising from a loss contingency should be recorded if the

Which one of the following loss contingencies would be accrued as a liability rather than disclosed in the notes to the financial statement?

Linden Corporation is a defendant in a lawsuit where the plaintiff is seeking $1,000,000 in damages. The company had terminated the plaintiff, George Russell, from his position with Linden after Russell allegedly sold specifications for one of Linden’s new products to a competitor. Linden’s attorney believes that it is quite possible Linden will lose the case and that, if so, damages could range from $100,000 to $200,000. Regardless of the outcome of the case, Linden’s accountants estimate the company will incur an additional $5,000 in unemployment costs because of Russell’s termination. The amount that Linden should accrue because of the contingency in this situation is

Ichabod Company is the plaintiff in two lawsuits. The first suit involves a competitor who has made an exact copy of one of Ichabod’s products, and Ichabod is suing for patent infringement. The attorneys estimate a $5,000,000 award for Ichabod; however, it is anticipated that the case will be in litigation for 2 to 3 years before final resolution. The second case also involves patent infringement; however, in this instance, the attorneys do not believe Ichabod has a strong case. It is estimated that the company has a 50% chance of winning and the award, if any, would be in the $250,000 to $1,000,000 range. The most appropriate amount to be recorded as a gain contingency is

Warren Company is being sued in a wrongful discharge suit for $500,000. The company attorney has advised Warren that the probability of the plaintiff prevailing and receiving the full amount is about 80%. The attorney also indicated that the case would likely be tied up in the courts for 2 to 3 years. The most appropriate financial statement presentation for this loss contingency would be to

In May Year 1, Caso Co. filed suit against Wayne, Inc., seeking $1.9 million in damages for patent infringement. A court verdict in November Year 4 awarded Caso $1.5 million in damages, but Wayne’s appeal is not expected to be decided before Year 6. Caso’s counsel believes it is probable that Caso will be successful against Wayne for an estimated amount in the range between $800,000 and $1.1 million, with $1 million considered the most likely amount. What amount should Caso record as income from the lawsuit in the year ended December 31, Year 4?

In May Year 1, Caso Co. filed suit against Wayne, Inc., seeking $1.9 million in damages for patent infringement. A court verdict in November Year 4 awarded Caso $1.5 million in damages, but Wayne’s appeal is not expected to be decided before Year 6. Caso’s counsel believes it is probable that Caso will be successful against Wayne for an estimated amount in the range between $800,000 and $1.1 million, with $1 million considered the most likely amount. What amount should Caso record as income from the lawsuit in the year ended December 31, Year 4?

On January 17, year 2, an explosion occurred at a Sims Co. plant causing extensive property damage to area buildings. Although no claims had yet been asserted against Sims by March 10, year 2, Sims’ management and counsel concluded that it is likely that claims will be asserted and that it is reasonably possible Sims will be responsible for damages. Sims’ management believed that $1,250,000 would be a reasonable estimate of its liability. Sims’ $5,000,000 comprehensive public liability policy has a $250,000 deductible clause. In Sims’ December 31, year 1 financial statements, which were issued on March 25, year 2, how should this item be reported?

Brite Corp. had the following liabilities at December 31, year 2:
Accounts payable $55,000
Unsecured notes, 8%, due 7/1/Y3 400,000
Accrued expenses 35,000
Contingent liability 450,000
Deferred income tax liability 25,000
Senior bonds, 7%, due 3/31/Y3 1,000,000
The contingent liability is an accrual for possible losses on a $1,000,000 lawsuit filed against Brite. Brite’s legal counsel expects the suit to be settled in year 4, and has estimated that Brite will be liable for damages in the range of $450,000 to $750,000. The deferred income tax liability is not related to an asset for financial reporting and is expected to reverse in year 4. What amount should Brite report in its December 31, year 2 balance sheet for current liabilities?

On February 5, year 3, an employee filed a $2,000,000 lawsuit against Steel Co. for damages suffered when one of Steel’s plants exploded on December 29, year 2. Steel’s legal counsel expects the company will lose the lawsuit and estimates the loss to be between $500,000 and $1,000,000. The employee has offered to settle the lawsuit out of court for $900,000, but Steel will not agree to the settlement. In its December 31, year 2 balance sheet, what amount should Steel report as liability from lawsuit?