3465 - liability depending upon the chance of loss If the...

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  CA 13-7 Question 2 Part 2 Constantine Company is being sued for $4,000,000 for an injury caused to a child as a result of alleged negligence while the child was visiting the Constantine Company plant in March 2010. The suit was filed in July 2010. Constantine’s lawyer states that it is probable that Constantine will lose the suit and be found liable for a judgment costing anywhere from $400,000 to $2,000,000. However, the lawyer states that the most probable judgment is $1,000,000. Question 2: How should Constantine report the suit in its 2010 financial statements? Discuss the rationale for your answer. Include in your answer disclosures, if any that should be made in Constantine’s financial statements or notes.     Solution: The probable loss from the law suit can be reported as a provision or as contingent
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Unformatted text preview: liability depending upon the chance of loss. If the chance of losing the law suit is more likely than not it should be reported in the financial statement as provision for doubtful loss on the other hand if the chance of losing the law suit is not more likely than not than it should be treated as contingent liability. As contingent liability do not form part of the financial statement but is shown by way of foot note, it should be shown as a foot note. In the given case Constantine’s lawyers states that it is more likely that the company will lose the law suit and they can incur a liability anything between $400,000 to $2,000,000 more likely $1,000,000. Thus the company should make a provision for the said amount and must disclose in the notes to account the reason for such provision....
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