Vaughn Manufacturing is being sued for illness caused to local residents as a result of negligence on the company's part in permitting the local residents to be exposed to highly toxic chemicals from its plant. Vaughn's lawyer states that it is probable that Vaughn will lose the suit and be found liable for a judgment costing Vaughn anywhere from $1820000 to $8970000. However, the lawyer states that the most probable cost is $5370000. As a result of the above facts, Vaughn should accrue O a loss contingency of $5370000 but not disclose any additional contingency. O a loss contingency of $1820000 and disclose an additional contingency of up to $7150000. O no loss contingency but disclose a contingency of $1820000 to $8970000. O a loss contingency of $5370000 and disclose an additional contingency of up to $3600000.

Vaughn Manufacturing is being sued for illness caused to local residents as a result of negligence on the company's part in permitting the local residents to be exposed to highly toxic chemicals from its plant. Vaughn's lawyer states that it is probable that Vaughn will lose the suit and be found liable for a judgment costing Vaughn anywhere from $1820000 to $8970000. However, the lawyer states that the most probable cost is $5370000. As a result of the above facts, Vaughn should accrue O a loss contingency of $5370000 but not disclose any additional contingency. O a loss contingency of $1820000 and disclose an additional contingency of up to $7150000. O no loss contingency but disclose a contingency of $1820000 to $8970000. O a loss contingency of $5370000 and disclose an additional contingency of up to $3600000.

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

Vaughn Manufacturing is being sued for illness caused to local residents as a result of negligence on the company's part in permitting
the local residents to be exposed to highly toxic chemicals from its plant. Vaughn's lawyer states that it is probable that Vaughn will
lose the suit and be found liable for a judgment costing Vaughn anywhere from $1820000 to $8970000. However, the lawyer states
that the most probable cost is $5370000. As a result of the above facts, Vaughn should accrue
O a loss contingency of $5370000 but not disclose any additional contingency.
O a loss contingency of $1820000 and disclose an additional contingency of up to $7150000.
O no loss contingency but disclose a contingency of $1820000 to $8970000.
O a loss contingency of $5370000 and disclose an additional contingency of up to $3600000.

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