Freeman Motors, a motorcycle manufacturer, had the following contingencies. a. Freeman estimates that it is reasonably possible but not likely that it will lose a current lawsuit. Freeman's attorneys estimate the potential loss will be $4,500,000. b. Freeman received notice that it was being sued. Freeman considers this lawsuit to be frivolous. c. Freeman is currently the defendant in a lawsuit. Freeman believes it is likely that it will lose the lawsuit and estimates the damages to be paid will be $75,000. Determine the appropriate accounting treatment for each of the situations Freeman is facing.

Freeman Motors, a motorcycle manufacturer, had the following contingencies. a. Freeman estimates that it is reasonably possible but not likely that it will lose a current lawsuit. Freeman's attorneys estimate the potential loss will be $4,500,000. b. Freeman received notice that it was being sued. Freeman considers this lawsuit to be frivolous. c. Freeman is currently the defendant in a lawsuit. Freeman believes it is likely that it will lose the lawsuit and estimates the damages to be paid will be $75,000. Determine the appropriate accounting treatment for each of the situations Freeman is facing.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Concept explainers

Contingent Liabilities and Provisions

A contingent liability can be defined as a liability the occurrence of which is dependent upon the happening of an uncertain future event. It is generally recorded in the books only when the amount of liability can be reasonably estimated and the contingency is likely to occur shortly.

Question

S11-12 Accounting treatment for contingencies
Learning Objective 4
Freeman Motors, a motorcycle manufacturer, had the following contingencies.
a. Freeman estimates that it is reasonably possible but not likely that it will
lose a current lawsuit. Freeman's attorneys estimate the potential loss
will be $4,500,000.
b. Freeman received notice that it was being sued. Freeman considers this
lawsuit to be frivolous.
c. Freeman is currently the defendant in a lawsuit. Freeman believes it is
likely that it will lose the lawsuit and estimates the damages to be paid
will be $75,000.
Determine the appropriate accounting treatment for each of the situations
Freeman is facing.

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