Question

During 2018, Leucothea Co. became involved in a legal dispute with a supplier. At December 31, 2018, Leucothea’s legal advisor believed that an unfavorable outcome was probable. A reasonable estimate of resulting monetary damages is $100,000 but could be as much as $200,000. Leucothea has legal liability insurance coverage that limits their loss to $80,000. After the 2018 financial statements were issued, Leucothea agreed to settle the case for $125,000. What amount of accrued liability should Leucothea have reported in its December 31, 2018 balance sheet?

Answer 1

$80,000

Step-by-step explanation:

Prudence allows that liabilities should not be understated and assets should not be overstated .

As the case is probable to result to a liability by the lawyers assessment , this means that it is more likely to happen and liability should be recognized . However , there is an insurance that limits the liability to the tune of $80,000 regardless of the agreement made towards the settlement.

The sum of $80,00 should be recognized as the liability in the statement of financial position