Question

Away travel filed suit against west coast travel seeking damages for copyright violations. Away travel's legal counsel believes it is probable (but not certain) that away travel will win the lawsuit for an estimated amount in the range of 100,000 to200,000, with all amounts in the range considered equally likely. How should away travel report this litigation?

1) As a receivable for $150,000 with disclosure of the range in a disclosure only
2) No receivable is reported
3) As a receivable for $100,000 with disclosure of the range
4) As a receivable for $200,000 with disclosure of the range

Answer 1

Away Travel should not recognize a receivable for the litigation because the outcome is probable but not certain and no specific amount within the range is more likely. Instead, they should only disclose the range of possible outcomes in the financial statement notes.

Step-by-step explanation:

Away Travel should report the litigation in accordance with the accounting guidance for contingencies. In this case, since the outcome of the lawsuit is probable but not certain, and a precise amount within the range cannot be determined, Away Travel should not recognize a receivable in the financial statements. Instead, the appropriate action is to disclose the contingency and the range of possible outcomes in the notes to the financial statements. Recognizing a specific amount as a receivable, such as $150,000, $100,000, or $200,000, would not be appropriate without a more definitive determination of the outcome. Thus, option 2, 'No receivable is reported' is the correct accounting treatment.