Question

Huprey Co. is the defendant in the following legal claims. For each of following claims, does Huprey (a) record a liability, (b) disclose in notes, or (c) have no disclosure. 1. Huprey can resonably estimate that a pending lawsuit will result in damages of $1,280,000it is probable that Huprey will lose the case. Have no disclosure. Record a liability. Disclose in notes. 2. It is reasonably possible that Huprey will lose a pending lawsuit. The loss cannot be estimable. Have no disclosure. Disclose in notes. Record a liability. 3. Huprey is being sued for damages of $2,400,000. It is very unlikely (remote) that Huprey will lose the case. Have no disclosure. Record a liability. Disclose in notes. rev: 02_07_2018_QC_CS-117158

Answer 1

Answer:

1. Huprey can resonably estimate that a pending lawsuit will result in damages of $1,280,000, it is probable that Huprey will lose the case.

• Record a liability.  

2. It is reasonably possible that Huprey will lose a pending lawsuit. The loss cannot be estimable.

• Disclose in notes.

3. Huprey is being sued for damages of $2,400,000. It is very unlikely (remote) that Huprey will lose the case.

• Have no disclosure.

Explanation:

Contingent liabilities must be recorded only when it is probable that the liability will happen and you can estimate the associated costs.

When contingent liabilities are only reasonably possible or you cannot estimate the amount, they must be included in the footnotes of the financial statements.

When contingent liabilities are not reasonably possible, nothing needs to be disclosed.