Answered: On November 5, 2020, a ABC Corporation…

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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Question

On November 5, 2020, a ABC Corporation truck was in an accident with an auto driven by nel. ABC received notice on January 12, 2021 of a lawsuit for P700,000 damages for personal injuries suffered by nel. ABC’s counsel believes it is probable that Nel will be awarded an estimated amount in the range between P200,000 and P450,000, and that P300,000 is a best estimate of potential liability than any other amount. ABC’s accounting year ends on December 31, and the 2020 financial statements were issued on March 2, 2021. What amount of loss should ABC accrue at December 31, 2020?

Group of answer choices

A. 450,000

B. 0

C. 300,000

D. 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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