Question

Freeman​ Motors, a motorcycle​ manufacturer, had the following contingencies. Determine the appropriate accounting treatment for each of the situations Freeman is facing. a. Freeman estimates that it is reasonably possible but not likely that it will lose a current lawsuit.​ Freeman's attorneys estimate the potential loss will be​ $4,500,000. ▼ Describe the situation in a note to the financial statements. Do not disclose. Record an expense and a liability based on estimated amounts. b. Freeman received notice that it was being sued. Freeman considers this lawsuit to be frivolous. ▼ Describe the situation in a note to the financial statements. Do not disclose. Record an expense and a liability based on estimated amounts. c. Freeman is currently the defendant in a lawsuit. Freeman believes it is likely that it will lose the lawsuit and estimates the damages to be paid will be​ $75,000.

Answer 1

a. Freeman estimates that it is reasonably possible but not likely that it will lose a current lawsuit.​ Freeman's attorneys estimate the potential loss will be​ $4,500,000.

• Describe the situation in a note to the financial statements.

Since the event is possible but not likely, it should be disclosed in the footnotes of the financial statements.

b. Freeman received notice that it was being sued. Freeman considers this lawsuit to be frivolous.

• Do not disclose.

Since this is a frivolous lawsuit, there is no need to disclose it.

c. Freeman is currently the defendant in a lawsuit. Freeman believes it is likely that it will lose the lawsuit and estimates the damages to be paid will be​ $75,000.

• Record an expense and a liability based on estimated amounts.

Since the negative outcome is probable and you were able to quantify your losses, you must record the expense for $75,000 and include the amount as a current liability.