Question

Determine what action (record liability (R), disclose in footnotes (D), no disclosure (N) is required for the following contingent liabilities:

a) A disgruntled employee is suing the company for wrongful termination. The company attorney believes the company will probably need to pay damages, but the amount cannot be reasonably estimated

b) Same facts as (a) above except the damages are estimated at $45,000

c) A customer sues the company for medical expenses and suffering resulting from a slip and fall. A review of surveillance footage reveals the accident was staged. The company attorney believes there is only a remote possibility the customer will win the lawsuit.

Answer 1

a) A disgruntled employee is suing the company for wrongful termination. The company attorney believes the company will probably need to pay damages, but the amount cannot be reasonably estimated – Disclose in Footnotes (D)

Explanation: Since the liability is probable but the amount for the same cannot be estimated, the contingent liability is required to be disclosed in the notes.

b) Same facts as (a) above except the damages are estimated at $45,000 – Record liability (R)

Explanation: Since the liability is probable and the amount of the same can be reasonably estimated, the contingent liability is required to be recorded in the books.

c) A customer sues the company for medical expenses and suffering resulting from a slip and fall. A review of surveillance footage reveals the accident was staged. The company attorney believes there is only a remote possibility the customer will win the lawsuit – No disclosure (N)

Explanation: Since there is only a remote possibility of the occurrence of the liability, no recording or disclosure is required.