Answered: In August 2021, a company's worker was…

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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In August 2021, a company's worker was injured in the factory in an accident partially the result of his own negligence. The worker has sued the company for P800,000. The company's counsel believes it is possible but not probable that the outcome of the suit will be unfavorable, and that the settlement would cost the company from P250,000 to P500,000. At year-end, the company should A. disclose the existence of a contingent liability with a range of P250,000 to P500.000. B. disclose the existence of a contingent liability for P375,000. C. record a liability of P375.000. D. do nothing. A suit for breach of contract seeking damages of P2,400,000 was filed by an author against a company on October 4, 2021. The company's legal counsel believed that an unfavorable outcome is probable. A reasonable estimate of the award to the plaintiff is between P600,000 and P1,800,000. No amount within this range is a better estimate of potential damages than any other amount. At yearend, the company should A. disclose the existence of a contingent liability with a range of P600,000 to P800,000. B. record a liability of P1,200,000. C. do nothing. D. disclose the existence of a contingent liability for P1,200,000.

Definition Definition Costs that a business is responsible for paying, should a particular event potentially occur in the future. Also called a potential liability, a contingent liability is generally recorded only when the amount of liability can be reasonably estimated and the contingency is likely to occur shortly. The Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Principles (IFRS) make it mandatory for the companies to record any contingent liability taking the principles of full disclosure, materiality, and prudence into consideration.

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