Question

Huprey Co. is the defendant in the following legal claims. For each of following claims, does Humphrey (a) record a liability, (b) disclose in notes, or (c) have no disclosure. 1. Humphrey can reasonably estimate that a pending lawsuit will result in damages of $1,280,000it is probable that Huprey will lose the case. Have no disclosure. Disclose in notes. Record a liability. 2. It is reasonably possible that Huprey will lose a pending lawsuit. The loss cannot be estimable. Record a liability. Disclose in notes. Have no disclosure. 3. Huprey is being sued for damages of $2,400,000. It is very unlikely (remote) that Huprey will lose the case. Disclose in notes. Record a liability. Have no disclosure.

Answer 1

1. Record a liability.

2. Disclose in notes.

3. Disclose in notes.

Step-by-step explanation:

The issue here relates to a Contingent Liability which is a provision that is recorded in the books as a liability if there is a likelihood that the firm will incur it in future. This is usually done for law suits.

The general rule is: Record a liability if the loss is probable and estimable.

If a loss is not probable, disclose it in the notes.

If a loss is not estimable, disclose it in the notes.

1. Loss is both estimable and it is probable that Humphrey will lose the case. It should be recorded as a liability.

2. It is probable that Humphrey will lose the case however, loss is not estimable. Disclose in the notes.

3. It is not probable that Humphrey will lose the case. Disclose in the notes.