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Subject Topic: FAR - 2009 AICPA #30 Post ReplyPost New Topic
  
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CCTUNG
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Joined: 22 Oct 2008
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Posted: 24 May 2009 at 22:32 | IP Logged Quote CCTUNG

CPADuring
2004, a former employee of Dane Co. began a suit against Dane for wrongful termination in
November 2003. After considering all of the facts, Dane's legal counsel believes that the former
employee will prevail and will probably receive damages of between $1,000,000 and $1,500,000, with
$1,300,000 being the most likely amount. Dane's financial statements for the year ended December 31,
2003, will not be issued until February 2004. In its December 31, 2003, balance sheet, what amount
should Dane report as a liability with respect to the suit?
a. $0
b. $1,000,000
c. $1,300,000
d. $1,500,000
Explanation
Choice "c" is correct

Why not the answer is not 1,000,000?Thanks

 

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jay_usa
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Joined: 16 Dec 2007
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Posted: 24 May 2009 at 22:38 | IP Logged Quote jay_usa

This is a Loss contingency which is both probable and estimable..So need to accrue and disclose..Lawyers have estimated the most likely amount, so that need to be accrued. In this case, its 1,300,000

Assume that they could not estimate the most likely amount, then you are right, we will accrue the minimum amount 1,000,000

Hope that helps.




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cpanet
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Joined: 01 Oct 2003
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Posted: 15 Jul 2009 at 14:04 | IP Logged Quote cpanet

Solutions have been released, you can find them here:
http://www.beckercpa.com/students/2009_Financial_Released_Qu estions_with_A.pdf

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TagLink
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Joined: 06 May 2009
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Posted: 11 Aug 2009 at 14:01 | IP Logged Quote TagLink

When choosing an amount for contigent loss:

First, choose an amount with highest chance (in this case, 130,000)

Second, if there is a range of amount wiht equal levels of probability, choose the leaset one

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tetsuwangatomu
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Joined: 08 Oct 2010
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Posted: 28 Oct 2010 at 01:39 | IP Logged Quote tetsuwangatomu

Best estimate is the key.

If no estimate is available, then the lowest one in the range.

Becker explains it better.

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