Question

The following items represent various material contingencies of Luge Co. at December 31, Year 5, and events subsequent to December 31, Year 5, but prior to the issuance of the Year 5 financial statements. For each item, select from the option list provided the correct reporting requirement. Each choice may be used once, more than once, or not at all.

a) Disclosure Only

b) Accrual and Disclosure

c) Neither accrual nor disclosure

d) Accrual of the minimum amount of range and disclosure

e) Accrual of the maximum amount of range and disclosure

f) Accrual of the midpoint of range and disclosure

Contingency Answer

1. On December 1, Year 5, Luge was awarded damages of $75,000 in a patent infringement suit it brought against a competitor. The defendant appealed the verdict. It is probable that the appeal will fail.

2. Luge has been sued by a former employee for wrongful dismissal. Although the trial was incomplete at the balance sheet date, Luge's attorney believes that the result would be unfavorable. Subsequent to that date but before the statements are available to be issued, an unfavorable verdict was issued. However, no damages have been determined. The probable loss is between $400,000 and $600,000, but no amount within this range is more likely than any other.

3. On December 31, Year 5, Luge entered into an operating lease with the lessor. Luge guaranteed the residual value of the leased asset. The probability is remote that a payment will be made under the guarantee.

4. A government contract completed during Year 5 is subject to renegotiation. Luge estimates a slight chance that a refund of approximately $50,000 may be required by the government.

5. It is probable that Luge will be legally responsible for the cleanup of toxic materials at a site it owns where a prior owner conducted operations. Luge reliably estimates that its probable share of remedial action will cost $600,000 to $900,000 (each point in this continuous range is as likely as any other). In accordance with IFRS, Luge recognizes a provision.

6. On December 30, Year 5, Luge acquired and insured a fleet of vehicles to be used in its business. Luge reasonably estimates that $200,000 in losses will be incurred in Year 6 for future damage to the property of others as a result of the use of these vehicles.

Answer 1