Question

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 statements according to U.S. GAAP. Required: 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 $1,000,000. 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 $2,000,000 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. 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 $1,000,000. 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 $500,000.

Answer 1

Answer 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 $1,000,000.

Not Accrued

Explanation: Estimated from loss contingency is accrued when both the conditions below are satisfied:

1. it is probable that a liability has been incurred as of the date of the financial statements and
2. the amount of the loss can be reasonably estimated.

Answer 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 $2,000,000 to $4,000,000, with any damage in that range equally likely."

Liability $2,000,000

Explanation:

Estimated from loss contingency is accrued when both the conditions below are satisfied:

1. it is probable that a liability has been incurred as of the date of the financial statements and
2. the amount of the loss can be reasonably estimated.

For estimated loss, when there is a range of possible outcomes, the amount accrued should be the most likely amount and if no single amount is most likely than the others, the minimum amount in the range is accrued.

Answer 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."

Liability $5,00,000

Explanation:  

Estimated from loss contingency is accrued when both the conditions below are satisfied:

1. it is probable that a liability has been incurred as of the date of the financial statements and
2. the amount of the loss can be reasonably estimated.

For estimated loss, when there is a range of possible outcomes, the amount accrued should be the most likely amount and if no single amount is most likely than the others, the minimum amount in the range is accrued.

Answer 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 $1,000,000."

Not accrued

Explanation: Contingencies that might result in gains are usually not reflected in accounts.

Answer 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 $500,000."

Not accrued

Explanation: Contingencies that might result in gains are usually not reflected in accounts.