CHAPTER 13 Current Liabilities and Contingencies 753 The following selected circ

Question

CHAPTER 13 Current Liabilities and Contingencies 753 The following selected circumstances relate to pending lawsuits for Erismus, Inc. Erismus's fiscal year ends on December 31. Financial statements are issued in March 2019. Erismus prepares its financial state to U.S. GAAP Required: Indicate the amount of asset or liability that Erismus would record, and explain your answer. ments according 3-6 1. Erismu s is defending against a lawsuit. Erismus's management believes the company has a slightly 50/50 chance of eventually prevailing in court, and that if it loses, the judgment will be $1,000.000. worse tharn rismus's management believes it is probable that the company will lose in court. If it loses, management believes that damages could fall anywhere in the range of $2.000,000 to $4,000,000, with any damage in that range equally likely. 3. Erismus is defending against a lawsuit.Erismus's management believes it is probable that the company will lose in court. If it loses, management believes that damages will eventually be $5,000,000, with a present value of $3,500,000. will prevail in court, and that if it prevails, the judgment will be $1,000,000. eventually will prevail in court, and that if it prevails, the judgment will be $500,000. 4. Erismus is a plaintiff in a lawsuit. Erismus's management believes it is probable that the company eventually 5. Erismus is a plaintiff in a lawsuit. Erismus's management believes it is virtually certain that the company ni

Explanation / Answer

As per US GAAP, we can record contingent liability when the future events are probable to occur and the amount of the loss can be estimated reasonably.

And in case if of contingent asset, we will not record anything till the time the event occurs.

1) Here, in this scenario it is not probable that future event will occur. So, the loss amount will not be accrued in the financial statement.

2) Here, in this scenario it is probable that the future loss will occur. Now, here the amount of loss is in range and as per law when a range is given, we will record the loss from the lower value.

So, record liability of $ 2,000,000

3) Here, in this scenario it is probable that the future loss will occur. Also, as per law we have to record the losses at its future value and not present value.

So, record liability of $ 5,000,000

4) This is contingent asset. And as per US GAAP, we do not record contingent asset.

So, nothing will be accrued.

5)

This is contingent asset. And as per US GAAP, we do not record contingent asset.

So, nothing will be accrued.

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