Question

ABC Company filed suit against Lowland, Inc., seeking damages for copyright violations. Lowland' legal counsel believes it is probable that Lowland will settle the lawsuit for an estimated amount in the range of $180,000 to $280,000, with all amounts in the range considered equally likely. How should Lowland report this litigation

Answer 1

Lowland should recognize a contingent liability of:

$230,000 in the current period.

Step-by-step explanation:

a) Data and Calculations:

Estimated amount for lawsuit settlement:

$180,000 * 50% = $90,000

$280,000 * 50% = $140,000

$230,000

b) Lowland's contingent liability to ABC Company is the liability that may occur depending on the outcome of the lawsuit, which is in itself an uncertain future event. A contingent liability is recorded if the contingency is likely or probable, already established by Lowland's legal counsel, and the amount of the liability can be reasonably estimated.