Question

Wooten Co. 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. Wooten's lawyer states that it is probable that Wooten will lose the suit and be found liable for a judgment costing Wooten anywhere from $1,800,000 to $9,000,000. However, the lawyer states that the most probable cost is $5,400,000. As a result of the above facts, Wooten should accrue
A) a loss contingency of $1,800,000 and disclose an additional contingency of up to $7,200,000.
B) a loss contingency of $5,400,000 and disclose an additional contingency of up to $3,600,000.
C) a loss contingency of $5,400,000 but not disclose any additional contingency.
D) no loss contingency but disclose a contingency of $1,800,000 to $9,000,000.

Answer 1

Answer:

B) a loss contingency of $5,400,000 and disclose an additional contingency of up to $3,600,000.

Explanation:

The company should make the loss occur at this accoutning cycle as the current information states it will be a reasonable amount.

It should however make an additional disclosure but not a journal entry for the difference which isn't posted as it may occur and people willing to invest or lend the firm should be aware of these potential loss figures.