Question

A customer of RoughEdge Sharpeners alleges that RoughEdge's new razor sharpener had a defect that resulted in serious injury to the customer. RoughEdge believes the customer has a 51% chance of winning the case, and that if the customer wins the case, there is a range of losses of between $1,000,000 and $3,000,000 in which any number is equally likely to occur. Under U.S. GAAP, RoughEdge should accrue a liability in the amount of:A. $0B. $1,000,000C. $2,000,000D. $3,000,000

Answer 1

The answer is C. $2,000,000.

Step-by-step explanation:

Under U.S. GAAP, the contingent liabilities is accured when it meets the two criteria: The event is likely to happen ( that is, more than 50% of the chance that the liabilities will be assumed in the future) and it is possible to estimate the value of the liabilities.

Thus, liabilities in this case should be accrued ( so A. is eliminated).

The amount of accruals will be determined by the below calculation:

0.5 x (1,000,000 + 3,000,000) = $2,000,000; because it is given that any amount of loss is equally likely to occur in the given range from $1,000,000 to $3,000,000.

So, the answer is C. $2,000,000.