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

As per U.S. GAAP, no amount to be recorded for contingency of any actual loss, as contingent liability is to be disclosed in the Notes to the financial statements and no amount to be recorded in the books for estimated loss.

Therefore, Option “No amount will be recorded but an amount will be disclosed in the notes to the financial statements.” is the correct option.

The other options, $50,000, $60,000, $100,000 and $150,000 are incorrect as there will be no recording of any amount in the books.