Question

Scroll down to complete all parts of this task. For each of the following independent situations, select from the option list provided the appropriate effect, if any, on Company A's December 31, Year 3, financial statements. Each choice may be used once, more than once, or not at all. Situation Effect 1. On December 31, Year 3, Company A incurred a probable loss that can be reasonably estimated between $50,000 and $300,000. No amount within the range appears to be a better estimate than any other. Accrual of a liability of $50,000 2. The occurrence of a gain contingency is probable and its amount can be reasonably estimated as $300,000. Disclosure in the notes but not an accrual 3. On December 1, Year 3, one of Company A's customers filed a lawsuit against the company. Company A's management concludes that $300,000 is the reliable estimate of the costs that would result from the unfavorable ruling against the company. The company's management and legal counsel agree that the likelihood of an unfavorable ruling is remote. Neither an accrual nor a disclosure 4. On December 1, Year 3, one of Company A's employees sued the company for damages caused by unsafe working conditions. At the end of Year 3, management concludes that it is probable Company A will be held liable for damages, and that $300,000 would be a reasonable estimate of the amount to be paid to the employee to settle the lawsuit. Company A's $1 million comprehensive liability insurance policy has a $50,000 deductible clause. Accrual of a liability of $50,000 5. On December 31, Year 3, Company A's management and legal counsel agree that it is probable that the company will have to pay $300,000 to settle a lawsuit against the company. Accrual of a liability of $300,000 6. On December 31, Year 3, Company A's management and legal counsel conclude that it is reasonably possible that Company A will be held liable in a lawsuit that was brought by the local government for environmental damages, and that the reasonable estimate of the amount the company will need to pay to settle the suit is between $50,000 and $300,000.

Answer 1

For each of the following independent situations, select from the option list provided the appropriate affect, if any, on Company A's December 31, Year 3, financial statements. Each choice may be used once, more than once, or not at all.

Situation	Effect
1. On December 31, Year 3, Company A incurred a probable loss that can be reasonably estimated between $50,000 and $300,000. No amount within the range appears to be a better estimate than any other. Accrual of a liability of $50,000	Accrual of a liability of $50,000
2. The occurrence of a gain contingency is probable and its amount can be reasonably estimated as $300,000.	Disclosure in the notes but not an accrual
3. On December 1, Year 3, one of Company A's customers filed a lawsuit against the company. Company A's management concludes that $300,000 is the reliable estimate of the costs that would result from the unfavorable ruling against the company. The company's management and legal counsel agree that the likelihood of an unfavorable ruling is remote	Neither an accrual nor a disclosure
4. On December 1, Year 3, one of Company A's employees sued the company for damages caused by unsafe working conditions. At the end of Year 3, management concludes that it is probable Company A will be held liable for damages, and that $300,000 would be a reasonable estimate of the amount to be paid to the employee to settle the lawsuit. Company A's $1 million comprehensive liability insurance policy has a $50,000 deductible clause.	Accrual of a liability of $50,000
5. On December 31, Year 3, Company A's management and legal counsel agree that it is probable that the company will have to pay $300,000 to settle a lawsuit against the company.	Accrual of a liability of $300,000
6. On December 31, Year 3, Company A's management and legal counsel conclude that it is reasonably possible that Company A will be held liable in a lawsuit that was brought by the local government for environmental damages, and that the reasonable estimate of the amount the company will need to pay to settle the suit is between $50,000 and $300,000.	Disclosure in the notes but not an accrual