Indicate the amount Erismus would record as an asset, liability, or not accrued in the following...

Indicate the amount Erismus would record as an asset, liability, or not accrued in the following circumstances.

1. Erismus is defending against a lawsuit. Erismus's management believes the company has a slightly worse than 50/50 chance of eventually prevailing in court, and that if it loses, the judgment will be $1,860,000.
2. 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 could fall anywhere in the range of $2,670,000 to $5,340,000, 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 $5,350,000, with a present value of $3,745,000.
4. Erismus is a plaintiff in a lawsuit. Erismus's management believes it is probable that the company eventually will prevail in court, and that if it prevails, the judgment will be $1,860,000.
5. Erismus is a plaintiff in a lawsuit. Erismus’s management believes it is virtually certain that the company eventually will prevail in court, and that if it prevails, the judgment will be $670,000.

Solutions

Expert Solution

1. Liability - Since there is worse than 50% chance of prevailing in the case, Erismus would provide for this as a liability in the books for the year to the extent of $1860000.

2 Liability - Erismus believes the probability to loose the case is higher.The company should have a appraoch of prudence and conservatism and provide for the $5340000. Later depending on the outcome of the case the excess provision made could be reversed in the relavant financial year.

3.Liability - Erismus believes that probably it will loose the case. Hence the present value that is payable should be accrued .i.e $3745000. Because of time value of money, provisions relating to cash outflow that may arise soon after the reporting date may be more onerous than the actual cash outflow. Provisions are discounted wherever there is a material effect.

4. Not accrued - Since Erismus feels it is only probable that they may prevail, it should not immediately record any transaction while this can be reported in the notes to financial statements. This will be recorded on the balance sheet only when realization of cash flows becomes certain.

5. Asset - Since Erismus is certain that they will prevail in the court, $670000 is recorded.

ekkarill92 answered 2 years ago

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