Question

Bugs, Inc., a wholly owned subsidiary of the U.S.-based company, Pillows Ltd., was notified of a loss contingency with an estimated cost ranging between $50,000 and $150,000. Bugs, Inc. hired an expert appraiser who assessed that all possible dollar amounts of liability in this range are equally likely. Management of Bugs, Inc. has estimated that there is a 60 percent chance that this contingency will result in an actual loss.

According to U.S. GAAP, what is the amount recognized by Bugs, Inc. as a provision for loss contingency?

Multiple Choice

• No amount will be recorded but an amount will be disclosed in the notes to the financial statements.

• $50,000

• $60,000

• $100,000

• $150,000

Answer 1

No amount will be recorded but an amount will be disclosed in the notes to the financial statements.

A Contingent liability is recorded when the chances are probable and the amount can be reasonably estimated.

As in the given case, the amount cannot be reasonably estimated so no Contingent liability it to be recorded.

However since the chances are probable an amount will be disclosed in the notes to the financial statements.

Option A is correct