Question

Huprey Co. is the defendant in the following legal claims. For each of the following claims, indicate whether Huprey should (a) record a liability, (b) disclose in notes, or (c) have no disclosure.

Answer 1

1. Record a liability.
2. Disclose in notes.
3. Have no disclosure.

Step-by-step explanation:

A contingent liability should only be recorded if the likelihood of it happening is known and the value can reasonably be estimated.

In the first scenario, it is likely that Huprey will lose so the likelihood is known. The value can also be reasonably estimated to be $1,070,000 so this should be recorded as a liability.

In the second scenario, the likelihood is known but the value cannot be estimated. In such a case, simply disclose this possibility in the notes of the financial statement.

For the third scenario, the possibility of the liability being incurred is remote so there is no need to either record or disclose the liability.